When the website known as ign.com thinks that it is qualified to tackle a real issue, it's a good idea to not pay much attention. They are not intelligent people.
That being said, I will briefly explain the conundrum that "the gaming world" now finds itself in. Capcom is set to release Resident Evil 5, the newest in the immensely popular Resident Evil series of survival-horror games (Akaash is currently slogging through number 4, the one set in Spain.) The game's premise is simple: there are zombies, and you must kill them, because zombies are bad. I'm sure the writers at Capcom will throw in a devious plot and shadowy corporation as well, but they relaly are peripheral. Zombies are shot, a game is played, the end.
Here's the catch: RE5 is set in Africa. This means that the majority (I will not say all, because I haven't played it) of antagonists are African, and not the kind with Dutch blood in them except possibly through flesh-consumption. The protagonist, on the other hand, is the almost-Bohemianly-white Chris Redfield. This means that for most if not all of the game, you control a white man with large guns (both firearms and biceps) who shoots many, many black people, I mean zombies. As (sigh) GuitarAtomik, a half-black blogger for destructoid.com, puts it, "the images of a white guy shooting up a village full of crazy black people could be a little jarring."
So, is RE5, and therefore Capcom, racist? Well, I will defer to the burden of proof principle. If you want to claim that this game is evidence that everyone at Capcom, or at least the ones making the decisions, are horrible racists themselves, I believe the burden of proof is on you, and I would like to see an internal memo or two before I take that accusation whole-heartedly.
However, certain aspects of the game - reported scenes such as the one in which non-infected (i.e. regular) Africans beat the shit out of a man on the ground for no reason or a black zombie drags a healthy white woman into a shed - must have been chosen for a reason. I don't think it's such a stretch to suppose that the reason was to play to classic racist stereotypes and fears - the presumed archetypal white male gamer will find the game scarier if the black man drags a white woman away because, even if they "are not racist," they're familiar with that scene from the trial in To Kill a Mockingbird or what have you, and therefore will respond to it with fear. So, in that sense, Capcom is certainly using race and racist imagery to make their game "better," and yes, I would call that unequivocally racist.
Wednesday, February 25, 2009
Thursday, February 19, 2009
How to Make My Day
Say something like this:
At the same time, however, this re-branding business is hilariously, hilariously tone-deaf. It reminds me of that Clone High episode with the Extreme Blue marketing team - I mean, what the hell does "Urban-Suburban Hip-Hop Settings" even mean? How exactly does a political party, especially one that uses terms like "Urban-Suburban Hip-Hop Settings", intend to reach these voters, and once reached, make them listen? I could go on, but there's really no point; the interview is so embarrassing that it needs no follow-up. Just read it.
The real problem, here, is that the Republican Party is facing a much larger dilemma than a lack of "hip-hop" voters. There have been various blogospheric debates over the last few months about this which I have followed with interest; despite my distaste for their policies and beliefs in general, I am typically of the mind that a strong, coherent opposition is important in American politics. The debate has broken down along several lines: some, like Erick Erickson at Red State, believe that a more technological, grass-roots operation will solve most of what ails the GOP. Others, like Ross Douthat, have argued that Republicans need to refocus themselves on domestic, working-class votes, combining economic populism with social conservatism to make the argument that conservative policies better serve these people. Others still, like Daniel Larison, are hoping for (but are realistic about) a dramatic reshaping of conservative ideology in the direction of isolationism and fiscal conservatism.
The solution, in my mind, is much closer to Douthat and Larison (there are many others in this camp, obviously). Almost every aspect of the Republic coalition has been tested in the last 8 years and failed under the scrutiny. How would putting a sideways hat on any of that nonsense make it more palatable? People aren't goldfish, and even if they don't have a specific grasp on policies they will associate, at least in the short- to medium-term, that crappy period of time in the 2000s with the GOP (this recession, too, will not be seen as a democratic recession, no matter how much Michelle Malkin wants it to be). The real fix to this situation is long-term and it will involve breaking down the current structures of influence in the Republican Party, something that Michael Steele doesn't seem particularly interested in doing.
Newly elected Republican National Committee Chairman Michael S. Steele plans an “off the hook” public relations offensive to attract younger voters, especially blacks and Hispanics, by applying the party's principles to “urban-suburban hip-hop settings.”Or:
Under Mr. Steele's helm, the “old” may seem inappropriate in the Grand Old Party's affectionate nickname. He said he is putting a new public relations team into place to update the party's image.Look, I feel for Michael Steele. He fought hard to win control of a party that is aimless, rudderless, and shrinking by the day. His win, which came by defeating Katon Dawson, a former member of a whites-only golf club, had the potential for an excellent media narrative, but instead it came off hollow, like the Republicans just figured a black person was all that was necessary to start winning again. And now, with most of the media oxygen in Washington going towards the stimulus and the possible bank nationalizations, it's difficult for the guy to wedge himself into the spotlight (unless, of course, he makes stupendously stupid statements about the economy).
“It will be avant garde, technically,” he said. “It will come to table with things that will surprise everyone - off the hook.”
At the same time, however, this re-branding business is hilariously, hilariously tone-deaf. It reminds me of that Clone High episode with the Extreme Blue marketing team - I mean, what the hell does "Urban-Suburban Hip-Hop Settings" even mean? How exactly does a political party, especially one that uses terms like "Urban-Suburban Hip-Hop Settings", intend to reach these voters, and once reached, make them listen? I could go on, but there's really no point; the interview is so embarrassing that it needs no follow-up. Just read it.
The real problem, here, is that the Republican Party is facing a much larger dilemma than a lack of "hip-hop" voters. There have been various blogospheric debates over the last few months about this which I have followed with interest; despite my distaste for their policies and beliefs in general, I am typically of the mind that a strong, coherent opposition is important in American politics. The debate has broken down along several lines: some, like Erick Erickson at Red State, believe that a more technological, grass-roots operation will solve most of what ails the GOP. Others, like Ross Douthat, have argued that Republicans need to refocus themselves on domestic, working-class votes, combining economic populism with social conservatism to make the argument that conservative policies better serve these people. Others still, like Daniel Larison, are hoping for (but are realistic about) a dramatic reshaping of conservative ideology in the direction of isolationism and fiscal conservatism.
The solution, in my mind, is much closer to Douthat and Larison (there are many others in this camp, obviously). Almost every aspect of the Republic coalition has been tested in the last 8 years and failed under the scrutiny. How would putting a sideways hat on any of that nonsense make it more palatable? People aren't goldfish, and even if they don't have a specific grasp on policies they will associate, at least in the short- to medium-term, that crappy period of time in the 2000s with the GOP (this recession, too, will not be seen as a democratic recession, no matter how much Michelle Malkin wants it to be). The real fix to this situation is long-term and it will involve breaking down the current structures of influence in the Republican Party, something that Michael Steele doesn't seem particularly interested in doing.
Monday, February 16, 2009
Another Thing That is Trying to Kill Our Economy
Now that the financial crisis has finally moved on to bigger and better things, infecting the good ol' economy of us regular folks with higher unemployment, home foreclosures and state government budget cuts, maybe you're thinking that the exclusionarily complex, initial-heavy world of investment banks, derivative trading and hedge funds is just so last September.
Well think again, square! Old is the new new, black is last month's red, and incompetently rated asset backed securities are this weeks Chapter 11 bankruptcies (actually, Chapter 11 is still around too, but its probably unfashionably depressing to talk about because it doesn't have a cool acronym):
This is basically the same story that got bandied around the news a lot last summer when everyone was desperately trying to figure out where the world's economy went. Except the cast has changed ever so slightly--by one letter actually. Last year's revelation that the leading rating agencies categorically failed to properly identify the risk in CDOs (financial packages full of different bonds backed by different loans made to different little people who were trying to buy little houses and little cars and little college tuitions), has been replaced with the shocking bit of news that, by the way, those same rating agencies also failed to identify similar risk in CLOs (financial packages full of different bonds backed by different loans made to different big people who are trying to buy big factories and big regional banks and big CDOs).
If you don't follow what I'm saying, the details aren't particularly important. What I think is important is that:
a) the entire point of constructing these needlessly complicated securities (CDOs and CLOs) was to reduce the risk of investment. Loaning money to one person or one company is kind of risky; maybe there is a 10% chance that that person or company will default and the lender will lose out. Loaning money to a whole bunch of people and then repackaging their loans into little, fancily titled securities was thought to be less risky; the risk that all of these loans would stop performing (the debtor would default) simultaneously is significantly less than 10%. But with lax regulation and lax oversight--i.e. rating agencies failing to recognize that the debt of 35 companies is touching perhaps half of the market--these kinds of debt security markets have only amplified rather than dampened the risk.
b) It's been said many a-time but I'll say it again: the rating agencies that evaluate the relative riskiness of these securities either need to be nationalized or to see the very foundations of that industry's business practices reformed. These are private companies that are paid per rating by the companies for whom they are doing the rating. Obviously their customers want a high rating for their bonds and the rating agencies like to retain the business of their customers. Wouldn't it be nice if the Food and Drug Administration worked that way when it decided on whether or not to approve a new anti-depressant ? Or if EPA had to compete with other agencies to evaluate the sulfur emissions of a coal plant?* It doesn't take a Nobel prize winning economist to identify the problem here. In fact, at this point its probably best if we keep the Nobel prize winning economists in the other room for now.
*For the sake of my argument and mental health I am assuming that this is not how either the FDA or the EPA work.
Well think again, square! Old is the new new, black is last month's red, and incompetently rated asset backed securities are this weeks Chapter 11 bankruptcies (actually, Chapter 11 is still around too, but its probably unfashionably depressing to talk about because it doesn't have a cool acronym):
Standard & Poor’s has highlighted that many collateralised loan obligations – which pool leveraged loans and sell differently rated investment notes with varying risk profiles – have exposure to the same group of borrowers. The default of just one of these widely held borrowers on their debt could have a negative effect on the credit quality of the portfolios of nearly 90 per cent of European CLOs, the agency said in a report.
In fact, the debt of just 35 different borrowers appears in nearly half of the 184 CLO portfolios that S&P rates. In total, those funds hold at least €90bn in assets. (Source: Financial Times)
This is basically the same story that got bandied around the news a lot last summer when everyone was desperately trying to figure out where the world's economy went. Except the cast has changed ever so slightly--by one letter actually. Last year's revelation that the leading rating agencies categorically failed to properly identify the risk in CDOs (financial packages full of different bonds backed by different loans made to different little people who were trying to buy little houses and little cars and little college tuitions), has been replaced with the shocking bit of news that, by the way, those same rating agencies also failed to identify similar risk in CLOs (financial packages full of different bonds backed by different loans made to different big people who are trying to buy big factories and big regional banks and big CDOs).
If you don't follow what I'm saying, the details aren't particularly important. What I think is important is that:
a) the entire point of constructing these needlessly complicated securities (CDOs and CLOs) was to reduce the risk of investment. Loaning money to one person or one company is kind of risky; maybe there is a 10% chance that that person or company will default and the lender will lose out. Loaning money to a whole bunch of people and then repackaging their loans into little, fancily titled securities was thought to be less risky; the risk that all of these loans would stop performing (the debtor would default) simultaneously is significantly less than 10%. But with lax regulation and lax oversight--i.e. rating agencies failing to recognize that the debt of 35 companies is touching perhaps half of the market--these kinds of debt security markets have only amplified rather than dampened the risk.
b) It's been said many a-time but I'll say it again: the rating agencies that evaluate the relative riskiness of these securities either need to be nationalized or to see the very foundations of that industry's business practices reformed. These are private companies that are paid per rating by the companies for whom they are doing the rating. Obviously their customers want a high rating for their bonds and the rating agencies like to retain the business of their customers. Wouldn't it be nice if the Food and Drug Administration worked that way when it decided on whether or not to approve a new anti-depressant ? Or if EPA had to compete with other agencies to evaluate the sulfur emissions of a coal plant?* It doesn't take a Nobel prize winning economist to identify the problem here. In fact, at this point its probably best if we keep the Nobel prize winning economists in the other room for now.
*For the sake of my argument and mental health I am assuming that this is not how either the FDA or the EPA work.
Sunday, February 15, 2009
Numb to the Stimulus?
The most common and predictable argument levied against the stimulus (against any stimulus really) is that increased government spending is immediately offset by a proportional decrease in private spending and investment. Here's how the hypothetical "crowding-out" scenario goes:
Step 1: the enlightened representatives of the public interest recognize that the economy is dire need of some of well-honed and intelligently crafted fiscal stimulus and sign the corresponding bill in good faith
Step 2: the Treasury Department (or some such ministry depending on the country) raises the funds prescribed by bill by either a) drawing on current tax revenue or b) borrowing money
Step 3: Since we're talking about the U.S. government, which is already in a serious amount of debt, obvious choice "b" is selected; the mechanism for borrowing the selling of bonds, pieces of paper that investors "buy" for a certain price in exchange for a corresponding rate of return. Note that while the Treasury department is "selling" these treasury bonds--the terminology of "buying" and "selling" maybe implies the exchange of an ordinary good, the bonds are simply i.o.u.s; when the Treasury Department "sells" new bonds, it is only selling future, higher payments for current payments (another word for borrowing money at interest)
Step 4: the increase in the supply of tradeable treasury bonds pushes down the market price for these bonds. If a bond is said to pay $1000 in 6 months, a fall in the price of the bond from $900 to $800 is effectively an increase in the rate of return on that bond from 11% to 25% (this is hypotethical; these yields are insanely high). Therefore you can think of the price of a bond being inversely related to the yield on that bond; when bond prices go up, yields go down, and when bond prices go down, yields go up. Therefore, if a flood of treasury bonds causes the price of various treasury bonds to drop, the yield rises. Likewise, this trend might be amplied by the concern of investors. If the U.S. government is spending more money there may be a) fears of inflation in the future which would mean that future bond yields will be worth less or b) fears of default. In both cases, this makes investors in the treasury bond market less willing to purchase bonds at the going price. Therefore, this decline in quantity demanded for treasury bonds pushes prices lower and thus yields higher.
Step 5: Higher treasury bond yields reverberate throughout the economy. Since lending money to the U.S. government is seen as about the most riskless investment activity there is, a higher yield in the treasury bond market pushes up interest rates throughout the economy. Think about it with the following example: Sol Bank can lend out $100,000 at a rate of 6% to Dave the home buyer for 15 years, or he can invest in Treasury Bonds at a rate of 4% over the same period. Depending on whether Sol wants to take the risk with Dave for the higher return or not, he will make his choice accordingly. But if interest rates on Treasury Bonds rise from 4% to 6%, the choice for Sol Bank is pretty obvious; don't lend to Dave, lend to Uncle Sam. If thousands of bankers (and equity investors and bond investors) are making similar calculations about the tradeoffs between higher rates or less risk, higher rates for treasury bonds will drive money away from mortgage and other commercial loans (and the stock market and the private bond market), and towards the treasury bond market. This decline in available funds for the private lending sector will cause interest rates throughout to increase (if there is less money available to lend to Dave and Sol can just invest in U.S. bonds, Sol Bank is only going to lend to Dave at a higher interest rate.
Step 6: Higher interest rates throughout the economy mean, among other things, less consumption of homes and other high value durable goods, less lending to private companies, less stock market activity, and less investment. Also, the increased interest rates will cause foreign investors to hold less foreign bonds and more U.S. assets; being denominated in U.S. currency, this will cause the U.S. dollar to appreciate, making our exports less attractive. The over all effect then is negative and, according the "crowding out" argument, sufficient to completely negate the effect of the stimulus. Except that now the government is in more debt.
Summarized somewhat more concisely:
But then again, numbers are numbers:
Step 1: the enlightened representatives of the public interest recognize that the economy is dire need of some of well-honed and intelligently crafted fiscal stimulus and sign the corresponding bill in good faith
Step 2: the Treasury Department (or some such ministry depending on the country) raises the funds prescribed by bill by either a) drawing on current tax revenue or b) borrowing money
Step 3: Since we're talking about the U.S. government, which is already in a serious amount of debt, obvious choice "b" is selected; the mechanism for borrowing the selling of bonds, pieces of paper that investors "buy" for a certain price in exchange for a corresponding rate of return. Note that while the Treasury department is "selling" these treasury bonds--the terminology of "buying" and "selling" maybe implies the exchange of an ordinary good, the bonds are simply i.o.u.s; when the Treasury Department "sells" new bonds, it is only selling future, higher payments for current payments (another word for borrowing money at interest)
Step 4: the increase in the supply of tradeable treasury bonds pushes down the market price for these bonds. If a bond is said to pay $1000 in 6 months, a fall in the price of the bond from $900 to $800 is effectively an increase in the rate of return on that bond from 11% to 25% (this is hypotethical; these yields are insanely high). Therefore you can think of the price of a bond being inversely related to the yield on that bond; when bond prices go up, yields go down, and when bond prices go down, yields go up. Therefore, if a flood of treasury bonds causes the price of various treasury bonds to drop, the yield rises. Likewise, this trend might be amplied by the concern of investors. If the U.S. government is spending more money there may be a) fears of inflation in the future which would mean that future bond yields will be worth less or b) fears of default. In both cases, this makes investors in the treasury bond market less willing to purchase bonds at the going price. Therefore, this decline in quantity demanded for treasury bonds pushes prices lower and thus yields higher.
Step 5: Higher treasury bond yields reverberate throughout the economy. Since lending money to the U.S. government is seen as about the most riskless investment activity there is, a higher yield in the treasury bond market pushes up interest rates throughout the economy. Think about it with the following example: Sol Bank can lend out $100,000 at a rate of 6% to Dave the home buyer for 15 years, or he can invest in Treasury Bonds at a rate of 4% over the same period. Depending on whether Sol wants to take the risk with Dave for the higher return or not, he will make his choice accordingly. But if interest rates on Treasury Bonds rise from 4% to 6%, the choice for Sol Bank is pretty obvious; don't lend to Dave, lend to Uncle Sam. If thousands of bankers (and equity investors and bond investors) are making similar calculations about the tradeoffs between higher rates or less risk, higher rates for treasury bonds will drive money away from mortgage and other commercial loans (and the stock market and the private bond market), and towards the treasury bond market. This decline in available funds for the private lending sector will cause interest rates throughout to increase (if there is less money available to lend to Dave and Sol can just invest in U.S. bonds, Sol Bank is only going to lend to Dave at a higher interest rate.
Step 6: Higher interest rates throughout the economy mean, among other things, less consumption of homes and other high value durable goods, less lending to private companies, less stock market activity, and less investment. Also, the increased interest rates will cause foreign investors to hold less foreign bonds and more U.S. assets; being denominated in U.S. currency, this will cause the U.S. dollar to appreciate, making our exports less attractive. The over all effect then is negative and, according the "crowding out" argument, sufficient to completely negate the effect of the stimulus. Except that now the government is in more debt.
Summarized somewhat more concisely:
Some economists, even left-of-center ones, find the above argument fairly presuasive (particularly given the current U.S. public deficit, the size of which, it is assumed, will make private investors that much more reluctant and risk-averse when it comes to lending the government more). Of course, we can all take refuge in the fact that this, like all else that currently ails America, can be blamed on Bush:Unprecedented deficits to fund stimulus and bailouts means flooding the market with Treasuries to raise funds. Flood the market with Treasuries and you get higher interest rates.* Higher interest rates means asset prices get hammered more than they already have been. Knock asset prices down any more and already tattered household and corporate balance sheets will simply get obliterated.
In other words, massive “stimulus”—or more precisely massive government borrowing—could be the very thing that turns this deep recession into a nasty depression. (Source: Option ARMageddon)
Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a big share of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion today that we really need. (Source: Jeff Frankel)But then, there are also those (and based on the support which the stimulus recieved, I'd say a less hysterical majority) who aren't really buying the standard talking point:
Crowding-out is real. Is it likely to happen? Well, if it were going to happen we would have seen the interest rates on U.S. long-term government bonds spiking upwards to scarily-high levels as the stimulus bill moves through the congress and its chances of final passage grow. Did we? No. (Source: Brad DeLong)I'm not sure how convinced I am by this. Just because the bond market doesn't react based on future expectations of higher inflation, increased default possibility or a future decline in stock prices, does not mean that the expectations expressed by the market are correct. Financial markets are notorioiusly "inefficient" in this respect (see the Dot Com bubble); afraid of lending to the private sector, of investing in the stock market, of doing just about anything else with their money, high levels of panicked demand for (safe) treasury bonds may be keeping prices artificially high. That demand might very well subside in the future.
But then again, numbers are numbers:
Therefore, despite a huge and sudden increase in the U.S. projected deficit, Treasury bond prices proved relatively resiliant. And in respond to my speculation that the financial crisis may soon subside, leading flighty investors to venture away from the warm and bountiful bosum of the American government, don't worry, say's Brad Setser: fear is here to stay.But even if central banks bought about $700 billion of US treasuries in 2008, private investors also increased their holdings of Treasuries by over $1 trillion. In a year. That too is a record.
Some of those Treasuries were used to fund the Fed’s crisis lending, some funded the TARP and some funded the fiscal deficit. But in some sense it doesn’t matter. The market absorbed that huge increase in stock – and Treasuries even rallied in the process.
Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year … without pushing yields up.
The financial crisis should subside this year. The US government isn’t going to let a big bank fail. But the financial crisis has turned into a severe economic crisis. Consumption is falling in the US and globally; investment is tumbling. That frees up funds for the Treasury market. (Source: Brad Setser)Update: A more substantial criticism:
Richard Kahn had argued in his famous 1931 article that an increase in the fiscal
deficit, far from "crowding out" private investment (we ignore net capital exports), generated through a
"multiplier" process, at any given interest rate, a larger output and employment
in the economy, such that private savings at this larger output exceeds private
investment by an amount exactly equal to the fiscal deficit. Indeed, private
investment is likely to increase within this period itself, or in subsequent
periods, on account of the larger output, in which case we have "crowding in"
rather than "crowding out". (Source: Amit Bhaduri)
Friday, February 13, 2009
Fannie and Freddie and JP and Stanley and...
Good news on the housing front:
The move may be partly political as well:
As for the eventual success of that particular aspect of the Obama/Geithner plan, not everyone is so optimistic:
Government-controlled mortgage finance companies Fannie Mae and Freddie Mac said Friday they have immediately suspended all foreclosure sales involving occupied single-family and 2-4 unit properties through March 6. This is to give troubled borrowers more time to work with loan servicers to avoid losing their homes.As far as I can interpret this, this is a sort-of-kind-of thumbs up from the major banks to the Obama plan to restructure troubled mortgages and subsidize homeowners who are underwater. At the moment, no bank wants default on a massive scale and no bank wants to seize property only to have to sell it into a trouble market (see my previous post). But now that Obama's plan is seen as a kind of inevitability, the Banks may be holding off, assuming that Obama's plan is going to make such widescale foreclosure activity unnecessary. That's my take on it anyway, but I'm honestly not that sure.
...
Meanwhile, Citigroup, JPMorgan Chase and Morgan Stanley said they had placed a moratorium on foreclosing on some home loans to give the government time to launch a $50 billion mortgage relief program. (Soure: CNBC)
The move may be partly political as well:
"I've talked to all the major servicers—both the big bank ones and the big independent ones—and they are all ready to go, they're chomping at the bit,'' Lockhart, the director of the Federal Housing Finance Agency, said. "The other thing they're asking for standardization.''On top of that, following Fannie and Fredie's lead by temporarily suspending foreclosures and working with the administration probably generates some profitable good will. If the banks are going to be forced into taking a haircut in the near future, maybe they all want to make sure that each one is coming out equally mutilated.
As for the eventual success of that particular aspect of the Obama/Geithner plan, not everyone is so optimistic:
Another "evolving plan". I think they will discover that there is no easy method for successful loan modifications (as FDIC Chairwoman Sheila Bair discovered when they took over IndyMac). I guess the plan is to buy down loans with the $50 billion - or pay a portion of the monthly payment.We'll have to wait and see.
The details will be interesting. I'm curious - how do you measure success when the borrowers aren't already in default? (Source: Calculated Risk)
Night of the Living Red*
Confused by the credit freeze? Stumped by the stock market? Flummoxed by finance? Bewildered by balance sheets?
As if it hasn't been talked up enough already, I would really recommend to anyone who is still unclear about the root cause of the credit freeze to check out the most recent episode of "Planet Money." I couldn't figure out how to link the episode directly, so you'll have to rummage through the archives yourselves if you're interested.
If not, the episode is essentially about bank insolvency: how it's define, how its relevant to the current crisis and what the government can or should do about it. It's that last point that I find the most interesting and which I don't think the episode got sufficiently all up in.
To summarize for those who don't know and don't want to listen to the podcast, a bank is insolvent when its liabilities exceed its assets. Actually, the way it's typically stated is when liabilities plus equity exceed its assets, but essentially the concept is the same. A bank is insolvent when it owes more than it has. A bank's liabilities is money it owes to other people (depositers, bondholders, direct lenders, nowadays the government...), while owner's equity is money that the bank itself has (or, more likely, that it owes is shareholders). In any event, liabilities and equity both constitute money that the bank owes to someone or something--either within or outside the bank. Assets, on the other hand, is all the value that the bank has. If Sol's Bank lends $1000 to Sarah, that loan is obviously a liability for Sarah, but for Sol, that grand plus interest is an asset.
Unfortunately, assets aren't always easy to price. If Sarah loses her job and all of a sudden it seems much less likely that she will be able to pay Sol back, the value of Sol Bank's asset is much diminished. By how much? Ask Sol and he will tell you that in all likelihood, Sarah will find a new job, that she will get the money to pay him back, and that his asset is still worth around $1000. Ask investor Dave, though, and he takes a look at Sarah's credit rating, at her person history, at the fact that she spent her $1000 on baking supplies and knitting material, and Dave will say that that asset is as good as worthless. Maybe he would be willing to take it off Sol Bank's hands for $200 (just in case, by some miracle Sarah does get a job and pay back the loan), but no more.
So here we have an asset of indeterminate value. Now imagine that there are trillions of dollars of such loans plugging up the balance sheets of banks everywhere. The banks can't/won't sell their assets because, especially since so many of them are loans collateralized by houses (a default forfeits real estate to the bank) and home prices are down many-a-percent all over the country, selling off these assets would force the banks to seriously write down the value of their overall assets. For many banks, its very likely that if they were forced to sell these "toxic" assets into the market at face value, they would all be insolvent. And by regulation in the U.S., once a bank is recognized to be insolvent, it must be shut down by the FDIC.
Why is this regulation in place? Because insolvent banks are not only recognized to be a problem for the banks creditors (i.e. if TD goes bankrupt tomorrow, without insurance I, the depositor, lose all of my money), insolvent banks are bad for the entire financial system. Like the living dead, these zombie banks can sustain their tenous grasp upon an unholy lifeforce only by feeding on the living. Aside from not having any money to lend out and freezing up credit for everyone, zombie banks are dangerous.
Above: "GAINS! GAAAAIIIIINNNNSSS!"
The issue is one of that characteristically vague and generally unhelpful economic concept (like most economic concepts), moral hazard. If someone doesn't face any additional risk in participating in risky behavior, so goes the idea, that person will be more likely to engage in that behavior. The standard economic example takes health insurance as an inducer of moral hazard behavior: if you're insured, you're going to be less careful when you decide to, say, allow your friend to piledrive you off of a roof into your mom's coffee table. But, like most standard economic examples, it's really stupid.
A better example of relevant and realistic moral hazard behavior is, conveniently, one of an insolvent bank. If Sol Bank discovers that he owes $100 billion to his depositors and lenders, that $10 billion is owned by the bank's shareholders, and that the $110 billion in loans he has on his books is actually worth, due to an ill-timed and entirely unexpected downturn in everything in the economy ever, $50 billion at current market prices, Sol Bank is effectively bankrupt. Even if Sol tries to sell off all of his assets, he would only be able to pay half of his liabilities off, to say nothing of his shareholders. Likewise, if Sol tries to make up the difference by borrowing the difference, that is only a temporary solution because that only increases the money he owes. Sol Bank is a Zombie Bank--its alive, but it shouldn't be--but don't tell the Treasury Department.
Sol (Braaaainns!) Bank only has one option. He can borrow some cash and try to find a series of investments that provides a much higher rate of return. Introduce Dan's Bean and Hard Boiled Egg Restaurant. Fortunately for Sol, since Dan has a terrible credit rating and is well-known for leaving his hard-boiled eggs on the stove for hours at a time, nobody will lend to him. It's for that reason that Dan has to accept a higher interest rate and it's for that reason that Sol can make big money by lending to Dan. It's a bit of a gamble for S(B!)B, since it may not be likely that Dan will actually pay any of the money back, but then again not too big a gamble: if Sol doesn't invest risky, he's certain to go under, if he does, he only might.
And that's moral hazard behavior. An insolvent bank is much more likely to make risky decisions than one that isn't, which is why almost every country in the world has fairly unequivicol regulation stating that insolvent banks cannot be allowed to exist.
So this is the potential problem the U.S. Department of Treasury now faces. If they don't act, many a-bank will go insolvent, which puts an enormous amount of pressure on an already overburdened FDIC and rattles the confidence of everyone in just about anything. If they do act, they can either a) effectively subsidize the banking industry by buying up their assets for more than their market value (giving Sol Bank $1000 for his loan to Sarah even though it isn't very likely Sarah will pay back), or b) buy the bank and absorb all of its losses. In both cases, the government is taking an enormous hit, but in the first case, the bank management stays in place and is basically rewarded for lending to bums like Sarah and Dan in the first place.
And that is moral hazard behavior. In the second case, on the other hand, you might end up with (gasp!) bureaucrats (likely handpicked off Wall Street anyway) managing the bank without succumbing to moral hazard behavior, since the demands of depositors are now insured by the proverbial printing presses of the Federal Reserve. There is no pressure to get the bank rapidly out of insolvency, only responsibly. But then we'd have something very bad which I won't even say except that it rhymes with fashion-ballzation (kind of) and then the shareholders might lose out.
Above: the face of fashion-ballzation
And in the end, when the shareholders lose out, don't we all?
*Get it? 'Cause the banks are "in the red," right? Would "Night of the Living Fed" have been better? Not quite as relevant. Maybe "Night of Living Ted-Spread"? God, I'm so lonely.
As if it hasn't been talked up enough already, I would really recommend to anyone who is still unclear about the root cause of the credit freeze to check out the most recent episode of "Planet Money." I couldn't figure out how to link the episode directly, so you'll have to rummage through the archives yourselves if you're interested.
If not, the episode is essentially about bank insolvency: how it's define, how its relevant to the current crisis and what the government can or should do about it. It's that last point that I find the most interesting and which I don't think the episode got sufficiently all up in.
To summarize for those who don't know and don't want to listen to the podcast, a bank is insolvent when its liabilities exceed its assets. Actually, the way it's typically stated is when liabilities plus equity exceed its assets, but essentially the concept is the same. A bank is insolvent when it owes more than it has. A bank's liabilities is money it owes to other people (depositers, bondholders, direct lenders, nowadays the government...), while owner's equity is money that the bank itself has (or, more likely, that it owes is shareholders). In any event, liabilities and equity both constitute money that the bank owes to someone or something--either within or outside the bank. Assets, on the other hand, is all the value that the bank has. If Sol's Bank lends $1000 to Sarah, that loan is obviously a liability for Sarah, but for Sol, that grand plus interest is an asset.
Unfortunately, assets aren't always easy to price. If Sarah loses her job and all of a sudden it seems much less likely that she will be able to pay Sol back, the value of Sol Bank's asset is much diminished. By how much? Ask Sol and he will tell you that in all likelihood, Sarah will find a new job, that she will get the money to pay him back, and that his asset is still worth around $1000. Ask investor Dave, though, and he takes a look at Sarah's credit rating, at her person history, at the fact that she spent her $1000 on baking supplies and knitting material, and Dave will say that that asset is as good as worthless. Maybe he would be willing to take it off Sol Bank's hands for $200 (just in case, by some miracle Sarah does get a job and pay back the loan), but no more.
So here we have an asset of indeterminate value. Now imagine that there are trillions of dollars of such loans plugging up the balance sheets of banks everywhere. The banks can't/won't sell their assets because, especially since so many of them are loans collateralized by houses (a default forfeits real estate to the bank) and home prices are down many-a-percent all over the country, selling off these assets would force the banks to seriously write down the value of their overall assets. For many banks, its very likely that if they were forced to sell these "toxic" assets into the market at face value, they would all be insolvent. And by regulation in the U.S., once a bank is recognized to be insolvent, it must be shut down by the FDIC.
Why is this regulation in place? Because insolvent banks are not only recognized to be a problem for the banks creditors (i.e. if TD goes bankrupt tomorrow, without insurance I, the depositor, lose all of my money), insolvent banks are bad for the entire financial system. Like the living dead, these zombie banks can sustain their tenous grasp upon an unholy lifeforce only by feeding on the living. Aside from not having any money to lend out and freezing up credit for everyone, zombie banks are dangerous.
Above: "GAINS! GAAAAIIIIINNNNSSS!"
The issue is one of that characteristically vague and generally unhelpful economic concept (like most economic concepts), moral hazard. If someone doesn't face any additional risk in participating in risky behavior, so goes the idea, that person will be more likely to engage in that behavior. The standard economic example takes health insurance as an inducer of moral hazard behavior: if you're insured, you're going to be less careful when you decide to, say, allow your friend to piledrive you off of a roof into your mom's coffee table. But, like most standard economic examples, it's really stupid.
A better example of relevant and realistic moral hazard behavior is, conveniently, one of an insolvent bank. If Sol Bank discovers that he owes $100 billion to his depositors and lenders, that $10 billion is owned by the bank's shareholders, and that the $110 billion in loans he has on his books is actually worth, due to an ill-timed and entirely unexpected downturn in everything in the economy ever, $50 billion at current market prices, Sol Bank is effectively bankrupt. Even if Sol tries to sell off all of his assets, he would only be able to pay half of his liabilities off, to say nothing of his shareholders. Likewise, if Sol tries to make up the difference by borrowing the difference, that is only a temporary solution because that only increases the money he owes. Sol Bank is a Zombie Bank--its alive, but it shouldn't be--but don't tell the Treasury Department.
Sol (Braaaainns!) Bank only has one option. He can borrow some cash and try to find a series of investments that provides a much higher rate of return. Introduce Dan's Bean and Hard Boiled Egg Restaurant. Fortunately for Sol, since Dan has a terrible credit rating and is well-known for leaving his hard-boiled eggs on the stove for hours at a time, nobody will lend to him. It's for that reason that Dan has to accept a higher interest rate and it's for that reason that Sol can make big money by lending to Dan. It's a bit of a gamble for S(B!)B, since it may not be likely that Dan will actually pay any of the money back, but then again not too big a gamble: if Sol doesn't invest risky, he's certain to go under, if he does, he only might.
And that's moral hazard behavior. An insolvent bank is much more likely to make risky decisions than one that isn't, which is why almost every country in the world has fairly unequivicol regulation stating that insolvent banks cannot be allowed to exist.
So this is the potential problem the U.S. Department of Treasury now faces. If they don't act, many a-bank will go insolvent, which puts an enormous amount of pressure on an already overburdened FDIC and rattles the confidence of everyone in just about anything. If they do act, they can either a) effectively subsidize the banking industry by buying up their assets for more than their market value (giving Sol Bank $1000 for his loan to Sarah even though it isn't very likely Sarah will pay back), or b) buy the bank and absorb all of its losses. In both cases, the government is taking an enormous hit, but in the first case, the bank management stays in place and is basically rewarded for lending to bums like Sarah and Dan in the first place.
And that is moral hazard behavior. In the second case, on the other hand, you might end up with (gasp!) bureaucrats (likely handpicked off Wall Street anyway) managing the bank without succumbing to moral hazard behavior, since the demands of depositors are now insured by the proverbial printing presses of the Federal Reserve. There is no pressure to get the bank rapidly out of insolvency, only responsibly. But then we'd have something very bad which I won't even say except that it rhymes with fashion-ballzation (kind of) and then the shareholders might lose out.
Above: the face of fashion-ballzation
And in the end, when the shareholders lose out, don't we all?
*Get it? 'Cause the banks are "in the red," right? Would "Night of the Living Fed" have been better? Not quite as relevant. Maybe "Night of Living Ted-Spread"? God, I'm so lonely.
Thursday, February 12, 2009
Eine Followen-Üp
So, one day later.
Livni has put her foot down saying that Kadima will not support a far-right coalition and that Kadima is not afraid to be the opposition. They seem confident that
Leiberman has said he has decided who his party will recommend as Prime Minister (the way the appointment of Prime Minister works is Israel is the President asks all the MK's who they want to be Prime Minister and then he says "good idea"), but won't say who. Hint: It's Bibi.
IDF votes have not changed the seat apportionment, which is good because it means Livni will stay ahead of Bibi, but also bad because I had hoped it would give enough seats to Meretz-Yachad (the far-left party I'd probably vote for if I lived in Israel) to allow them to have a sitting member.
Rumours are floating around that Livni has been courting Lieberman on their shared secular agendas, saying that if Lieberman supports her she'll make a priority the recognition of civil marriage that is one of Lieberman's actually good ideas.
The leader of Shas is reportedly attempting to form an ultra-Orthodox bloc with 16 seats to counter Lieberman's 15 - I expected that the religious parties, Lieberman, and Bibi would come together on their mutual hatred of Palestine, but apparently I underestimated how much the religious parties dislike Lieberman too. This could be a good thing if it prevents a Netanyahu-led government from doing anything, especially considering if Livni ends up PM (unlikely) that she would not have been able to further anything anyway.
My base predictions: another election within 2 years.
Livni has put her foot down saying that Kadima will not support a far-right coalition and that Kadima is not afraid to be the opposition. They seem confident that
Leiberman has said he has decided who his party will recommend as Prime Minister (the way the appointment of Prime Minister works is Israel is the President asks all the MK's who they want to be Prime Minister and then he says "good idea"), but won't say who. Hint: It's Bibi.
IDF votes have not changed the seat apportionment, which is good because it means Livni will stay ahead of Bibi, but also bad because I had hoped it would give enough seats to Meretz-Yachad (the far-left party I'd probably vote for if I lived in Israel) to allow them to have a sitting member.
Rumours are floating around that Livni has been courting Lieberman on their shared secular agendas, saying that if Lieberman supports her she'll make a priority the recognition of civil marriage that is one of Lieberman's actually good ideas.
The leader of Shas is reportedly attempting to form an ultra-Orthodox bloc with 16 seats to counter Lieberman's 15 - I expected that the religious parties, Lieberman, and Bibi would come together on their mutual hatred of Palestine, but apparently I underestimated how much the religious parties dislike Lieberman too. This could be a good thing if it prevents a Netanyahu-led government from doing anything, especially considering if Livni ends up PM (unlikely) that she would not have been able to further anything anyway.
My base predictions: another election within 2 years.
what, then, is economics?
today, i feel like straying away from the unqualified analyses of us economic policy that i've been prone to slip into. i'd rather stray into the wild border country of philosophy, a place where economics is ever more reluctant to go. i'll start with a question, one for which i can't, for the life of me, find an a satisfying answer.
what is economics?
or, rephrased more specifically
what is the study of economics for?
any of the most-read tomes which are dedicated to introducing the (heavily circumscribed) subject will answer as such: economics is concerned with the allocation of scarce resources. sometimes 'resources' will be replaced with the somewhat less ambiguous 'goods and services'. it doesn't take too much insight to notice immediately that this not a very satisfying statement, and is, moreover, a loaded one. is economics a science of distribution restricted to a range of material objects? if so, it doesn't behave very much like what we would expect of just such a science. what scale are we to assume? at the macro level, most economists defer to the satisfaction of pareto optimality as the only distributory condition worth meeting. so is it the micro level, then, that we are to worry about allocation--that is, how the individual chooses to allocate, to themselves, their choice of goods and services? if that is the case, what power would an aggreggative science have at all? wouldn't economics simply become a subset of psychology, able, in some instances, to deliver behavioral insights, but ultimately restricted to the micro-scale and therefore the idiosyncrasies of individual human beings?
i ask because i'm aware of a very prominent inadequacy which complicates my interest in economics. i really don't know what i'm supposed to be studying. on the one hand, there are vast pools of data, data that corresponds to innumerable sectors of human activity. there is data on stock markets, data on credit markets, data on income percentiles, data on income distribution; part-time and full-time labor markets and on income-streams by age cohort; unpaid domestic and volunteer labor vs. wage-labor markets. there is data, and there is a statistical science, econometrics, that is devoted to studying it. there are also models, endless numbers of models, models which visualize abstractions from these data sets and offer, therefore, potential insight into the correlation and directionality between certain variables. and then there is economic philosophy, the concern of which is the values that guide all of these numbers and which may, if aligned to so-and-so's satisfaction, deliver socially optimal results.
in the end, however, i can't find the walls that clearly delineates all of these things from anything else. the easy route would be to point at anything with an explicit dollar price and claim that it was my job to pour over it. unfortunately, the existence of 'negative externalities' prevents me from honestly believing that that is true. i can't help but agree with marx, that ultimately, all social structures emerge from economic arrangements, but i can't follow marx as far as pretending that these new mechanisms and the behavioral patterns that they enforce do not, in turn, affect those economic systems. maybe the early united states, founded, as it was, by independent farmers and merchants, adopted a weak federal system because of the difficulties posed by reigning in any further those powerful men; but what was the new deal if not the use of that federal system to change these economic circumstances?
i'm going to head off what i expect will be the immediate response to this post, which is to defend the usefulness of economics. i'm not doubting nor debating that. i'm only trying to understand at what point one can reasonably draw the line, a point at which the enormity of human action and its multiple contigencies is recognized, but where also measurement and therefore inference is still possible. i can't think of a pithy statement to sum up what i want. maybe someone else can?
p.s. i don't got no reason to use capitals. i tried it, i didn't like it, i ain't goin back, capisc'?
what is economics?
or, rephrased more specifically
what is the study of economics for?
any of the most-read tomes which are dedicated to introducing the (heavily circumscribed) subject will answer as such: economics is concerned with the allocation of scarce resources. sometimes 'resources' will be replaced with the somewhat less ambiguous 'goods and services'. it doesn't take too much insight to notice immediately that this not a very satisfying statement, and is, moreover, a loaded one. is economics a science of distribution restricted to a range of material objects? if so, it doesn't behave very much like what we would expect of just such a science. what scale are we to assume? at the macro level, most economists defer to the satisfaction of pareto optimality as the only distributory condition worth meeting. so is it the micro level, then, that we are to worry about allocation--that is, how the individual chooses to allocate, to themselves, their choice of goods and services? if that is the case, what power would an aggreggative science have at all? wouldn't economics simply become a subset of psychology, able, in some instances, to deliver behavioral insights, but ultimately restricted to the micro-scale and therefore the idiosyncrasies of individual human beings?
i ask because i'm aware of a very prominent inadequacy which complicates my interest in economics. i really don't know what i'm supposed to be studying. on the one hand, there are vast pools of data, data that corresponds to innumerable sectors of human activity. there is data on stock markets, data on credit markets, data on income percentiles, data on income distribution; part-time and full-time labor markets and on income-streams by age cohort; unpaid domestic and volunteer labor vs. wage-labor markets. there is data, and there is a statistical science, econometrics, that is devoted to studying it. there are also models, endless numbers of models, models which visualize abstractions from these data sets and offer, therefore, potential insight into the correlation and directionality between certain variables. and then there is economic philosophy, the concern of which is the values that guide all of these numbers and which may, if aligned to so-and-so's satisfaction, deliver socially optimal results.
in the end, however, i can't find the walls that clearly delineates all of these things from anything else. the easy route would be to point at anything with an explicit dollar price and claim that it was my job to pour over it. unfortunately, the existence of 'negative externalities' prevents me from honestly believing that that is true. i can't help but agree with marx, that ultimately, all social structures emerge from economic arrangements, but i can't follow marx as far as pretending that these new mechanisms and the behavioral patterns that they enforce do not, in turn, affect those economic systems. maybe the early united states, founded, as it was, by independent farmers and merchants, adopted a weak federal system because of the difficulties posed by reigning in any further those powerful men; but what was the new deal if not the use of that federal system to change these economic circumstances?
i'm going to head off what i expect will be the immediate response to this post, which is to defend the usefulness of economics. i'm not doubting nor debating that. i'm only trying to understand at what point one can reasonably draw the line, a point at which the enormity of human action and its multiple contigencies is recognized, but where also measurement and therefore inference is still possible. i can't think of a pithy statement to sum up what i want. maybe someone else can?
p.s. i don't got no reason to use capitals. i tried it, i didn't like it, i ain't goin back, capisc'?
The View From the Outside
Apparently, we aren't doing so bad. Key grafs:
The thing I wanted to note, though, was the suggestion Zakaria makes (I'll spare you all another blockquote) that Canadian banks are now in a position to expand dramatically as American banks struggle to deleverage and sell off their worthless assets. TD Bank, apparently, is now the 5th largest bank in North America (!), when it was 15th a year ago. It may come to pass that, as the US stumbles through a year or two of slow-moving credit and occasional unpleasant toxic-CDO valuation shocks, Canadian banks step in and start offering the necessary capital to keep the country alive, giving Canadians yet another reason to get drunk and self-righteously lecture Americans on how you guys should get your shit together. I, for one, can't wait.
Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th.
So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.
Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north. In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian homeownership? It's 68.4 percent.And, for Ben:
I could go on. The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal "permanent residents" in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25 points, for instance), he or she can become a full-time, legal resident of Canada.Alright, so as nice as it is to have Fareed Zakaria fellate our fine country in the pages of Newsweek, the whole thing (which you should read, even if I gloatingly blockquoted the majority of it here anyway) is a little over-the-top. For one, it wasn't "common sense" that led to our maintaining of strict, sane banking regulations - we had a liberal government with a super-competent finance minister for years that worked diligently to get us where we are. If we'd had conservatives in power for the last however many years, and they had the parliamentary majority necessary to Americanize our financial structures, they probably would have. Secondly, he glosses over the massive dependence that we have on the American economy - for markets, for capital, for pretty much everything - as well as the whole collapse-of-the-Alberta-economy thing. Anyway, the article is obviously not meant to accurately assess the health of the Canadian economy as it is to quietly suggest to an American audience that regulation is not such a horrible thing, and I can definitely get behind that.
The thing I wanted to note, though, was the suggestion Zakaria makes (I'll spare you all another blockquote) that Canadian banks are now in a position to expand dramatically as American banks struggle to deleverage and sell off their worthless assets. TD Bank, apparently, is now the 5th largest bank in North America (!), when it was 15th a year ago. It may come to pass that, as the US stumbles through a year or two of slow-moving credit and occasional unpleasant toxic-CDO valuation shocks, Canadian banks step in and start offering the necessary capital to keep the country alive, giving Canadians yet another reason to get drunk and self-righteously lecture Americans on how you guys should get your shit together. I, for one, can't wait.
Wednesday, February 11, 2009
geithplan follow-up
$2 trillion for the bad bank and the markets run scared. as some trader at some firm whose opinion you're supposed to take as gospel says, "There are so many caveats and missing details that it lacks the cohesion and clarity which would be necessary to boost confidence." Confidence was all that this was about; it was the only word Paulson and Bernanke could say. They almost considered copying Europe's inflation policies in order to pump air in the old c-balloon. Do I sense a tremendous waste on the horizon, one prompted by one man's romantic history with Wall Street? It's days like this that I wish for four padded walls and a leather jacket.
The results are in: Israel hates itself
According to Wikipedia the results of the Knesset elections show a substantial pick up for the far right, though surprisingly (for a large part of the race) not enough to be the biggest party, which is still, thankfully, Kadima. Unfortunately, Labour has lost a ton of votes to Yisrael Beiteinu and right-wing religious parties, giving it an embarrassing fourth place in total seats behind Kadima, Likud, and Yisrael Beiteinu. Absentee and IDF votes have not yet been counted, and in 2006 these votes gave Likud one extra seat which essentially let Netanyahu remain relevant enough to potentially be Prime Minister in this election.
Now, I don't know what's probably going to happen, because I don't live in Israel and I am not a political analyst. However, I do know how to be both alarmist and absurdly optimistic, so that is what I will now do. Keep in mind that the actual result will be somewhere in between these two projections.
Brief Israeli civics lesson: The Knesset has 120 seats, assigned through direct proportion to the various parties. 61 seats is technically a majority. It's rare that any one party gets more than 30 seats, so the government of Israel is always made up of volatile coalitions in which the major parties have a knife held to their neck by the smaller special interest parties. In this election, interestingly the quintessentially special-interest Pensioners' Party has gone from seven seats to zero seats, and I like to think that Yisrael Beiteinu got all its extra votes from the old retirees who used to vote for the Pensioners (though that's not actually true, as I will explain later.)
Alarmist: As it currently stands, Kadima (28) + Labour (13) + left-wing Israeli parties (7) = 48 seats in a potential "centrist-left" coalition. If Livni were to allow the Arab parties to participate in this coalition (and the Arab parties are pragmatic enough to realize that that is, while still terrible, their best option, as not helping Kadima would mean at best no chance of negotiating with Palestine and at worst the forced expulsion of Isralei Arab citizens if Lieberman has his way), the "centrist-left-Arab" coalition would have seven more seats, bringing it to a total of 55 if my math is correct. This is not enough for a coalition, and I don't even know if letting Arab parties into such a coalition is at all feasible in current Israeli politics. Anyway, given that, if Likud and Yisrael Beiteinu were to combine forces, they would right off the bat have 42 seats, compared to the 41 that Kadima and Labour would hold without considering the far left parties. From that 42, it is very easy to see Netanyahu and Lieberman (in some sort of high-ranking cabinet position) letting in Shas, the right-wing religious-nationalist party, bringing them to 53, and then letting in the other right wing religious parties (Jewish Home, National Union, and United Torah Judaism) to bring their coalition to 65. If that were to happen, it could potentially mean that Israel, probably for the first time in history, would have a more right-wing government than the United States, and could potentially destroy any prospect of negotiation with Hamas under this Knesset. I don't think I need to explain why this would be a disaster. If Livni wants to be Prime Minister, she would probably need to court one or two of the Haredi (ultra-Orthodox) parties, which would result in the left-wing parties not being able to do much about domestic issues and ultra-Orthodox Jews in Israel remaining first-class citizens who do not pay taxes and do not serve in the army.
Absurdly Optimistic: The left-wing coalition courts a few of the more moderate MKs from Likud and then takes on a smaller ultra-Orthodox party to form a majority coalition. Lieberman is pushed aside and his party is marginalized. Nothing really gets done until the next election.
Anyway, apparently a lot of Israelis are very upset over the surge in right-wing power. A friend of mine lives across the street from Netanyahu (or "Bibi" as he is known is Israel) and apparently her day (which is spent in the home rearing children, because she is religious) is filled with vulgar shouting from across the street aimed at Bibi's house. This is welcome news.
Now, I don't know what's probably going to happen, because I don't live in Israel and I am not a political analyst. However, I do know how to be both alarmist and absurdly optimistic, so that is what I will now do. Keep in mind that the actual result will be somewhere in between these two projections.
Brief Israeli civics lesson: The Knesset has 120 seats, assigned through direct proportion to the various parties. 61 seats is technically a majority. It's rare that any one party gets more than 30 seats, so the government of Israel is always made up of volatile coalitions in which the major parties have a knife held to their neck by the smaller special interest parties. In this election, interestingly the quintessentially special-interest Pensioners' Party has gone from seven seats to zero seats, and I like to think that Yisrael Beiteinu got all its extra votes from the old retirees who used to vote for the Pensioners (though that's not actually true, as I will explain later.)
Alarmist: As it currently stands, Kadima (28) + Labour (13) + left-wing Israeli parties (7) = 48 seats in a potential "centrist-left" coalition. If Livni were to allow the Arab parties to participate in this coalition (and the Arab parties are pragmatic enough to realize that that is, while still terrible, their best option, as not helping Kadima would mean at best no chance of negotiating with Palestine and at worst the forced expulsion of Isralei Arab citizens if Lieberman has his way), the "centrist-left-Arab" coalition would have seven more seats, bringing it to a total of 55 if my math is correct. This is not enough for a coalition, and I don't even know if letting Arab parties into such a coalition is at all feasible in current Israeli politics. Anyway, given that, if Likud and Yisrael Beiteinu were to combine forces, they would right off the bat have 42 seats, compared to the 41 that Kadima and Labour would hold without considering the far left parties. From that 42, it is very easy to see Netanyahu and Lieberman (in some sort of high-ranking cabinet position) letting in Shas, the right-wing religious-nationalist party, bringing them to 53, and then letting in the other right wing religious parties (Jewish Home, National Union, and United Torah Judaism) to bring their coalition to 65. If that were to happen, it could potentially mean that Israel, probably for the first time in history, would have a more right-wing government than the United States, and could potentially destroy any prospect of negotiation with Hamas under this Knesset. I don't think I need to explain why this would be a disaster. If Livni wants to be Prime Minister, she would probably need to court one or two of the Haredi (ultra-Orthodox) parties, which would result in the left-wing parties not being able to do much about domestic issues and ultra-Orthodox Jews in Israel remaining first-class citizens who do not pay taxes and do not serve in the army.
Absurdly Optimistic: The left-wing coalition courts a few of the more moderate MKs from Likud and then takes on a smaller ultra-Orthodox party to form a majority coalition. Lieberman is pushed aside and his party is marginalized. Nothing really gets done until the next election.
Anyway, apparently a lot of Israelis are very upset over the surge in right-wing power. A friend of mine lives across the street from Netanyahu (or "Bibi" as he is known is Israel) and apparently her day (which is spent in the home rearing children, because she is religious) is filled with vulgar shouting from across the street aimed at Bibi's house. This is welcome news.
Tuesday, February 10, 2009
forget the stimulus
all the wrangling in congress and the senate is chump change compared to what's going to happen by fiat at the treasury department. while the elephants and the asses continue to play pork barrel tug-of-war, geithner has announced his extremely expensive plan to tackle the financial crisis. what, then, will the damage be?
- $1 trillion to guarantee triple-A rated securities backed by consumer debt-packages (student and car loans, credit cards, etc.). A program for this purpose already exists, but so far has only represented $200 billion worth of promises.
- Between $50 and $100 billion in funds for underwriting failed mortgages. Some of this will be distributed directly through Fannie Mae and Freddie Mac, and some will be used to subsidize private lenders.
- An unspecified sum for capital injections into banks in the form of convertible preferred shares. For those of you not familiar with preferred shares, they are the first to pay dividends but do not offer any voting rights.
And, the coup-de-grace
- $500 billion for the Bad Bank (though most analysts seem to believe that $1 trillion is a more likely sum). Geithner is unclear on how repricing of bad securities will be carried out. It looks, at least, like the Treasury will not allow a third-party to price the assets so that they can be auctioned off to the private sector. A 'public-private' partnership is now the new buzz word. This sort of strategy involves public capital leading private to buy up the assets, thus creating a market for them and, it is supposed, a reliable price mechanism--one backed by the assurance of federal funds.
I'm sure the most important question on everyone's mind grapes is whether or not this plan is shit, and if it's colossally costly shit. While the numbers are big, some of them are, for the moment, costless strategems for generating confidence. Guaranteeing securities with perfect credit ratings doesn't involve pledging any actual funds, unless credit markets go belly up again (which it might, still). In that case, the Fed has wide leeway to promise as much money as it wants. Since these securities are so, well, secure, insuring them further is meant to coerce banks into lending again. I am no financial wizard, but I think that this is an empty gesture. The securities in question are triple-AAA, and banks are most certainly aware of this. They don't need any insurance to make them safer. What is far more important as an indicator of a continuing credit freeze is recent USD LIBOR activity, which shows an upward trend across the board after a brief downward spike last month. This is especially true in comparison to euro LIBOR, a measure which has collapse by 50% during the same time period. The bottom-line is that dollar borrowing is expensive in absolute and relative terms, and there is the likelihood that that will continue to be the case as the Treasury looks for new funds for its interventions.
Details on the Bad Bank are also sketchy, especially now that this public-private collaboration is the primary strategy. The government is wary of so-called 'financial socialization', which is why, I suppose, so much emphasis is being placed on using private capital. Without more details on how pricing is expected to come about, I can't say if this strategy seems sound or not. That may, in fact, be its biggest problem, or these initial stages may be bunk, and there may be a complex and well-coordinated plan in the works.
But something else about what Geithner said gives me reason to be suspicious of him. His comments on the plan seem absent from a lot of major reporting--Reuters and the FT don't bother to include them, though the Times does. I think that this was a gross omission; the devil is there, lurking in the tall-grass of the details.As the Times puts it:
- $1 trillion to guarantee triple-A rated securities backed by consumer debt-packages (student and car loans, credit cards, etc.). A program for this purpose already exists, but so far has only represented $200 billion worth of promises.
- Between $50 and $100 billion in funds for underwriting failed mortgages. Some of this will be distributed directly through Fannie Mae and Freddie Mac, and some will be used to subsidize private lenders.
- An unspecified sum for capital injections into banks in the form of convertible preferred shares. For those of you not familiar with preferred shares, they are the first to pay dividends but do not offer any voting rights.
And, the coup-de-grace
- $500 billion for the Bad Bank (though most analysts seem to believe that $1 trillion is a more likely sum). Geithner is unclear on how repricing of bad securities will be carried out. It looks, at least, like the Treasury will not allow a third-party to price the assets so that they can be auctioned off to the private sector. A 'public-private' partnership is now the new buzz word. This sort of strategy involves public capital leading private to buy up the assets, thus creating a market for them and, it is supposed, a reliable price mechanism--one backed by the assurance of federal funds.
I'm sure the most important question on everyone's mind grapes is whether or not this plan is shit, and if it's colossally costly shit. While the numbers are big, some of them are, for the moment, costless strategems for generating confidence. Guaranteeing securities with perfect credit ratings doesn't involve pledging any actual funds, unless credit markets go belly up again (which it might, still). In that case, the Fed has wide leeway to promise as much money as it wants. Since these securities are so, well, secure, insuring them further is meant to coerce banks into lending again. I am no financial wizard, but I think that this is an empty gesture. The securities in question are triple-AAA, and banks are most certainly aware of this. They don't need any insurance to make them safer. What is far more important as an indicator of a continuing credit freeze is recent USD LIBOR activity, which shows an upward trend across the board after a brief downward spike last month. This is especially true in comparison to euro LIBOR, a measure which has collapse by 50% during the same time period. The bottom-line is that dollar borrowing is expensive in absolute and relative terms, and there is the likelihood that that will continue to be the case as the Treasury looks for new funds for its interventions.
Details on the Bad Bank are also sketchy, especially now that this public-private collaboration is the primary strategy. The government is wary of so-called 'financial socialization', which is why, I suppose, so much emphasis is being placed on using private capital. Without more details on how pricing is expected to come about, I can't say if this strategy seems sound or not. That may, in fact, be its biggest problem, or these initial stages may be bunk, and there may be a complex and well-coordinated plan in the works.
But something else about what Geithner said gives me reason to be suspicious of him. His comments on the plan seem absent from a lot of major reporting--Reuters and the FT don't bother to include them, though the Times does. I think that this was a gross omission; the devil is there, lurking in the tall-grass of the details.As the Times puts it:
Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by [Obama's] presidential aides ... The $500,000 pay cap for executives at companies receiving assistance, for instance, applies only to very senior executives ... the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment ... Nor is the government announcing any plans to replace the management of virtually any of the troubled institutions ... Finally, while the administration will urge banks to increase their lending, and possibly provide some incentives, it will not dictate to the banks how they should spend the billions of dollars in new government money.If we're going to stick to capitalism (in case you had hoped otherwise, that decision was made for you) we do need to have private capital, and private capital does need to participate in markets. Building incentives for private capital to move is sound. Unfortunately, I don't see them in this plan. By relying on existing financial institutions and their pre-crisis management, there will almost inevitably be deadweight loss as pay structures and incentives inefficient for the purposes of restructuring financial markets divert money from its most productive employment. Without any more radical moves markets will do what markets have been doing, and LIBOR will be a better indicator of what credit markets think than any of the Treasury's most lurid pipe dreams.
Wherein Zak and Lion are taught of a horrible truth
In yet another sign of the terrible, terrible collapse of the global economy, we see the reversing of the Newfie pump. For those non-Canadians, and possibly also those non-Canadians, here's a brief explanation of what I'm on about:
In the last four or so years, Calgary has been the centre of the majority of economic growth in the country. Partly, this had to do with the increasing cost of oil, which in turn made certain previously less profitable extraction methods viable, and partly it had to do with the massive global pool of cheap money, most of it flowing up from south of the border. For Calgary, this had four related effects. The first was a glut of jobs, more than Calgary itself could handle. The second was a general bump in wages, which (I assume) corresponds to a higher demand for workers to fill said jobs. The third was a huge influx of workers from out of the province - typically, these workers come from the "have-not" provinces of Canada where unemployment is quite high (the maritimes) - looking to make a quick six figures and then bounce back to their families on the other side of the country. As the above article notes, these workers file taxes back in their home provinces, which means that the Albertan economy is, and Maritimers admit as much, propping up the governments of the Atlantic coast in a very informal equalization payment kind of way. The fourth factor, which added a whole other layer of insanity to the overheating Albertan economy, was a huge increase in real estate prices, as demand for anywhere to stay or build or whatever shot up.
Calgary, being Calgary, didn't really do much to provide affordable housing to the Eastern hordes pouring in. Rent control, as far as I understand it, was minimal at best, allowing those who once offered low-cost living near the downtown core to raise prices quickly and severely, boot out all their old, poor tenants, demolish the buildings, and throw together deluxe "lifestyle" condominiums or apartment towers.
So, in simile terms, Calgary was acting like a giant demonic Roomba, rolling around Drew's apartment/Canada sucking up money and labour. Now, with the collapse of oil prices and the drying up of capital out there for infrastructure development (necessary for oilsands extraction), the city is having precisely the opposite effect. All the maritimers are packing up their things and heading home, much to the chagrin of their premiers. Calgary is essentially exporting unemployment to these provinces, provinces who spent the last half-decade gently pleading to their labourers to come back, and are now faced with the unpleasant certainty that they will.
What this means for Canada remains to be seen, although it can't be good: Calgary was a huge profit engine for the entire country, and it's booms and busts ripple across the continent in very chaotic ways. Unemployment will go up everywhere, and it will make Harper's various undirected attempts to right the ship-of-state much more difficult. What this means for Zak and Lion, though, is that their dreams of working in Calgary and earning enough to buy property in New York may require some rethinking, at least until oil prices rebound. Fruit-picking, anyone?
In the last four or so years, Calgary has been the centre of the majority of economic growth in the country. Partly, this had to do with the increasing cost of oil, which in turn made certain previously less profitable extraction methods viable, and partly it had to do with the massive global pool of cheap money, most of it flowing up from south of the border. For Calgary, this had four related effects. The first was a glut of jobs, more than Calgary itself could handle. The second was a general bump in wages, which (I assume) corresponds to a higher demand for workers to fill said jobs. The third was a huge influx of workers from out of the province - typically, these workers come from the "have-not" provinces of Canada where unemployment is quite high (the maritimes) - looking to make a quick six figures and then bounce back to their families on the other side of the country. As the above article notes, these workers file taxes back in their home provinces, which means that the Albertan economy is, and Maritimers admit as much, propping up the governments of the Atlantic coast in a very informal equalization payment kind of way. The fourth factor, which added a whole other layer of insanity to the overheating Albertan economy, was a huge increase in real estate prices, as demand for anywhere to stay or build or whatever shot up.
Calgary, being Calgary, didn't really do much to provide affordable housing to the Eastern hordes pouring in. Rent control, as far as I understand it, was minimal at best, allowing those who once offered low-cost living near the downtown core to raise prices quickly and severely, boot out all their old, poor tenants, demolish the buildings, and throw together deluxe "lifestyle" condominiums or apartment towers.
So, in simile terms, Calgary was acting like a giant demonic Roomba, rolling around Drew's apartment/Canada sucking up money and labour. Now, with the collapse of oil prices and the drying up of capital out there for infrastructure development (necessary for oilsands extraction), the city is having precisely the opposite effect. All the maritimers are packing up their things and heading home, much to the chagrin of their premiers. Calgary is essentially exporting unemployment to these provinces, provinces who spent the last half-decade gently pleading to their labourers to come back, and are now faced with the unpleasant certainty that they will.
What this means for Canada remains to be seen, although it can't be good: Calgary was a huge profit engine for the entire country, and it's booms and busts ripple across the continent in very chaotic ways. Unemployment will go up everywhere, and it will make Harper's various undirected attempts to right the ship-of-state much more difficult. What this means for Zak and Lion, though, is that their dreams of working in Calgary and earning enough to buy property in New York may require some rethinking, at least until oil prices rebound. Fruit-picking, anyone?
Monday, February 9, 2009
Stoking the fires of populist outrage
In the spirit of posting videos with little or no comment simply to make us all a little madder:
Sunday, February 8, 2009
OK, please help me out
So now the Stimulus Bill is going to pass. I would like to know if that is a good thing, and I would like to know it in the following order:
a) is it better that this bill is passing vs. nothing being done at all?
b) would it have been better if a trillion dollars were spent instead of 800 billion?
c) would it have been better if two trillion dollars were spent instead of either?
d) does this actually have a chance of preventing the depression from getting much, much worse?
e) and this is the difficult question, did Obama forever forsake liberals by allowing this bill?
a) is it better that this bill is passing vs. nothing being done at all?
b) would it have been better if a trillion dollars were spent instead of 800 billion?
c) would it have been better if two trillion dollars were spent instead of either?
d) does this actually have a chance of preventing the depression from getting much, much worse?
e) and this is the difficult question, did Obama forever forsake liberals by allowing this bill?
As much as it pains me to post something from the National Post...
This is op-ed piece written by Bob Rae about how, because the Canadian economy is also fucked, he'll no longer be the only Canadian politician whose name will forever be associated with deficits and job losses.
It's a very funny article, reminding me again why I can't understand why Michael Ignatieff is the leader of the Liberal Party. On a tangential and completely unfair comparison, we have:
Ignatieff, who writes a smarmy non-apology in NY Times magazine to cover his ass re: Iraq.
Rae, who takes to what is arguably the largest right-of-centre newspaper in Canada to write a humourous take on the fact that our country is going to shit (again) and now someone else's political career will have to suffer for it.
Fair? Balanced? Not in the slightest, but it's a damn funny article.
It's a very funny article, reminding me again why I can't understand why Michael Ignatieff is the leader of the Liberal Party. On a tangential and completely unfair comparison, we have:
Ignatieff, who writes a smarmy non-apology in NY Times magazine to cover his ass re: Iraq.
Rae, who takes to what is arguably the largest right-of-centre newspaper in Canada to write a humourous take on the fact that our country is going to shit (again) and now someone else's political career will have to suffer for it.
Fair? Balanced? Not in the slightest, but it's a damn funny article.
The Sweet Sounds of a Crumbling Empire
If you don't already know what Songsmith is, you better ask somebody. Preferably Youtube.
Here's what happens when you plug in all the indicators of America's rapid disintegration:
Here's what happens when you plug in all the indicators of America's rapid disintegration:
Saturday, February 7, 2009
Its ok
Jobloss is all part of the plan towards no employment for everyone (which means no work)! I think our president can explain the strategy best.
Oh wait shits getting way to complicated for him too.
we fucked.....
Oh wait shits getting way to complicated for him too.
we fucked.....
Wednesday, February 4, 2009
Why I Can't Be Fucked to Follow Canadian Politics: Hake-on-white-bean-gate!
This article had the kind of headline that caught my eye immediately: "Ignatieff takes heat for allowing rebellion". Ooh, I thought, some blowback. Recently, for the yanks among us, Michael Ignatieff, traveling scholar and recent posessor of the Liberal throne, told the Liberals that they should all vote in favour of Harper's budget, arguing that, basically, now is not the time to take the government down. The strategy, for him, was fairly simple: if the budget didn't pass, it was time for (another) election, and Canadians are consistent in their hatred of those who force an election, especially during a recession. I don't think anyone really believed he was going to oppose this budget, but everyone did the kabuki dance, said their piece about average hard-working Canadians, and then went on with the business of running this sham of a government.
Anyway, the trouble supposedly came when Ignatieff, after a dinner-meeting (of "hake on white bean and roasted cherry tomato salad", we are told) with the six liberal MPs from Newfoundland, allowed them to vote against the bill, contra the rest of the party. In America, where you're either a Democrat, a Republican, or from Vermont, voting against your party once or twice is not frowned upon, or at least not punished (especially if you're Joe Lieberman). In Canada, it often gets you kicked out of the party, which makes re-election a considerably more difficult process. Ignatieff, in a supposed moment of fatal weakness, said they could vote how they wanted and would not be cast out.
So, interesting story, in a typically uninteresting Canadian way. Their votes mean nothing, they were pissed about (as I understand it) a change in equalization payments, it's not like Ignatieff would have kicked all six of them out of his tiny little party, everything's cool, right? Wrong! The Globe and Mail has fearlessly dug up two and a half sources, all well-trained seismologists, to measure the shockwaves of this decision as they ripple across Ottawa. Who, might you ask? Well, an unnamed Liberal party member, some mysterious "Others among the Liberals", and Stephen Harper's former chief of staff, Tom Flanagan, who now lives in Calgary. What a line-up!
This is the equivalent of the Washington Post publishing a report about those seven house Democrats who voted against the stimulus, and citing Andrew Card as a reliable source on how fucked Obama is now. The most laughable part of the article, though, is this:
Of course Harper would never do something similar! That's why no one likes the guy! This is like arguing that Luke Skywalker can't defeat Vader cause he just isn't that willing to run around force choking every idiot in his way. It is unimaginable to me that Ignatieff could ever hope to be Prime Minister by making himself as unpopular as the guy he wants to replace.
This is part one of my upcoming many-part series: "Why I can't be fucked to follow Canadian Politics".
Update: Bonus hilarity: the Globe and Mail editorial page asserts that the real fall-out from Hake-and-white-bean-gate is that
Anyway, the trouble supposedly came when Ignatieff, after a dinner-meeting (of "hake on white bean and roasted cherry tomato salad", we are told) with the six liberal MPs from Newfoundland, allowed them to vote against the bill, contra the rest of the party. In America, where you're either a Democrat, a Republican, or from Vermont, voting against your party once or twice is not frowned upon, or at least not punished (especially if you're Joe Lieberman). In Canada, it often gets you kicked out of the party, which makes re-election a considerably more difficult process. Ignatieff, in a supposed moment of fatal weakness, said they could vote how they wanted and would not be cast out.
So, interesting story, in a typically uninteresting Canadian way. Their votes mean nothing, they were pissed about (as I understand it) a change in equalization payments, it's not like Ignatieff would have kicked all six of them out of his tiny little party, everything's cool, right? Wrong! The Globe and Mail has fearlessly dug up two and a half sources, all well-trained seismologists, to measure the shockwaves of this decision as they ripple across Ottawa. Who, might you ask? Well, an unnamed Liberal party member, some mysterious "Others among the Liberals", and Stephen Harper's former chief of staff, Tom Flanagan, who now lives in Calgary. What a line-up!
This is the equivalent of the Washington Post publishing a report about those seven house Democrats who voted against the stimulus, and citing Andrew Card as a reliable source on how fucked Obama is now. The most laughable part of the article, though, is this:
“But it is a sign of weakness in the brutal world of politics and will create problems in the longer run. Harper would never do something similar,” said Mr. Flanagan, now a political science professor at the University of Calgary.
Of course Harper would never do something similar! That's why no one likes the guy! This is like arguing that Luke Skywalker can't defeat Vader cause he just isn't that willing to run around force choking every idiot in his way. It is unimaginable to me that Ignatieff could ever hope to be Prime Minister by making himself as unpopular as the guy he wants to replace.
This is part one of my upcoming many-part series: "Why I can't be fucked to follow Canadian Politics".
Update: Bonus hilarity: the Globe and Mail editorial page asserts that the real fall-out from Hake-and-white-bean-gate is that
"Mr. Ignatieff has allowed for two different classes of MPs: those from Newfoundland, and those from everywhere else. That hardly seems like the way to restore party unity."This, it is further argued, somehow winds up hurting Newfoundland's chances for remaining relevant in federal politics, as it convinces Conservatives that Newfoundland is electorally irrelevant. Buh?
Tuesday, February 3, 2009
and now for something completely different
this, this, this and this, as well as innumerable others, confirm that the new york times company is in serious trouble, and that it is not alone. there is serious speculation that the print edition of the times here and the one in la, the boston herald (a new york times subsidiary), the washington post and the chicago tribune will all be nixed by the end of the year. the times has been having a fire sale over the past month to keep itself from keeling over dead: it's gotten desperate enough to pawn its office, its share in the tribune and new york's long-time rivals, the red sox. since september of last year its stock has lost 66% of its value--from 15.25 to just 5.10 today--forcing it to slash dividend payments by 75%. it has $625 million in long-term debt, and a $400 million credit line that's been maxed and is demanding repayment. to top it off, they've seen advertising revenue plunge (down 17.6% in the fourth quarter) along with circulation.
at least they're still a full-fledged paper, unlike the washington post and the la times. that paper has recently announced that, in order to save money, it will no longer carry an la section. that's right: it is too expensive for the la times to report on la. only from the national circuit can it afford to squeeze out a few measly dimes. the post has decided to put the kaibosh on its independent book review, and will be collapsing it, along with several other sections, into a more compact version of its standard daily. that, by the way, leaves the united states with only one, independent book review weekly: the new york review of books. one book review in a nation of 300 million people.
and that brings me to my point, which concerns but one of the many dooms leveled on us by the recession: the metamorphosis of news media. now, it has been obvious for many years that printed dailies were, at some point on the ever-darkening horizon, to become extinct. the fact of the matter is that people don't read newspapers anymore. now, you may protest, citing your own readership and that of your friends, but admit, before you do, that your committment to a particular periodical is casual at best. it is therefore also useless to the paper in maintaining its financial solvency. newspapers are dependent on advertising, and advertising revenues are in turn dependent on circulation. the individual cost of a newspaper is insignificant: for arguments sake, the times is $1.25 on the stand, and circulates about a 1,000,000 issues a day. it should be quite clear that the price of the thing is a drop in the bucket.
circulation is instead important because advertisers pay for exposure. specifically, they pay x fee for y number of copies sold. as circulation contracts, so does the artery that pumps blood into the sagging corpse of the newspaper. what are the dailies to do? the culprit here is, naturally, the internet, leading most papers towards some sort of web-based solution. the times, for instance, is contemplating charging for access to its webpage. the first problem with that idea is that it risks alienating times readers. it's easy to skip to another newspaper's website, one that's free of charge, in order to get your daily digest of headlines--and i suspect that most readers never get past the biggest font on the page. qualitative expectations of journalism have clearly fallen, as statistical evidence pointing to a near total end to fact-checking, and a subsequent rise in spurious reporting, confirms. it's doubtful, then, that a paper's reputation (though i think that the times is a shit rag, it is, unfortunately, one of the least shitty rags in the american bucket) can command as much respect in terms of marketing as can the cost of accessing its information. and as the cost of access is competed downwards and advertising revenues go with it--web ads are already a paltry source of cash--we have news organizations once more forced into a crunch. alternatives, such as diversification, have led most of the holding companies into what i call "japanese syndrome": they do a thousand things and lose money on all of them. the future isn't immediately bright.
the implication for journalism is that there will be an even more serious reducation in quality as papers find some way to keep costs in line with returns. and what is the most expensive part of making the news? making it good. fox news, having avoided this problem, is looking peachy--profit was only down 50% for the final quarter--compared to, let's say, the venerable tribune company, which went before a delaware bankruptcy judge two days ago. the integrity and, to be frank, utility of the news is almost assuredly going to fall as long as the news remains relatively expensive to make well. the internet is certainly no refuge for those in search of a new journalistic spirit. flim-flam abounds and fact-checking? blogs belong to a single person or to a small collection, at best. what kind of oversight could their possibly be? we don't even edit this blog (though we should). and besides, blogs just recycle what the news media reports, anyway. the best they've come up with is interesting insights in the form of commentary. exegesis is great, and all, but it's nothing without the text to gloss.
i remember reading a report filed last year that cited evidence that 75% of figures in british media went unverified, and that advertisers used the british press association like a ventriloquist's dummy. this is is the perennial problem: the bottom line. people are going where the money is. in the united states, as with every other sort of public service, we've decided decided that provisioning money for a public media service is a sin. somehow, it leads to socialism, just like, you know, the bbc did for stalin's britain. since we can't contribute to something like that, what are our options? where do good journalists go when they aren't allowed to see white house records, they can't spend more than a few days abroad, there's no space for literary criticism except to flog bestsellers, and, to top it off, the public wouldn't know a punchy, intelligent piece if it, well, punched them in the wing-wang? i'm willing to believe that something can be done, and i'd even be interested in doing it. as is all to evident, i must concede, i don't know what that it could be.
at least they're still a full-fledged paper, unlike the washington post and the la times. that paper has recently announced that, in order to save money, it will no longer carry an la section. that's right: it is too expensive for the la times to report on la. only from the national circuit can it afford to squeeze out a few measly dimes. the post has decided to put the kaibosh on its independent book review, and will be collapsing it, along with several other sections, into a more compact version of its standard daily. that, by the way, leaves the united states with only one, independent book review weekly: the new york review of books. one book review in a nation of 300 million people.
and that brings me to my point, which concerns but one of the many dooms leveled on us by the recession: the metamorphosis of news media. now, it has been obvious for many years that printed dailies were, at some point on the ever-darkening horizon, to become extinct. the fact of the matter is that people don't read newspapers anymore. now, you may protest, citing your own readership and that of your friends, but admit, before you do, that your committment to a particular periodical is casual at best. it is therefore also useless to the paper in maintaining its financial solvency. newspapers are dependent on advertising, and advertising revenues are in turn dependent on circulation. the individual cost of a newspaper is insignificant: for arguments sake, the times is $1.25 on the stand, and circulates about a 1,000,000 issues a day. it should be quite clear that the price of the thing is a drop in the bucket.
circulation is instead important because advertisers pay for exposure. specifically, they pay x fee for y number of copies sold. as circulation contracts, so does the artery that pumps blood into the sagging corpse of the newspaper. what are the dailies to do? the culprit here is, naturally, the internet, leading most papers towards some sort of web-based solution. the times, for instance, is contemplating charging for access to its webpage. the first problem with that idea is that it risks alienating times readers. it's easy to skip to another newspaper's website, one that's free of charge, in order to get your daily digest of headlines--and i suspect that most readers never get past the biggest font on the page. qualitative expectations of journalism have clearly fallen, as statistical evidence pointing to a near total end to fact-checking, and a subsequent rise in spurious reporting, confirms. it's doubtful, then, that a paper's reputation (though i think that the times is a shit rag, it is, unfortunately, one of the least shitty rags in the american bucket) can command as much respect in terms of marketing as can the cost of accessing its information. and as the cost of access is competed downwards and advertising revenues go with it--web ads are already a paltry source of cash--we have news organizations once more forced into a crunch. alternatives, such as diversification, have led most of the holding companies into what i call "japanese syndrome": they do a thousand things and lose money on all of them. the future isn't immediately bright.
the implication for journalism is that there will be an even more serious reducation in quality as papers find some way to keep costs in line with returns. and what is the most expensive part of making the news? making it good. fox news, having avoided this problem, is looking peachy--profit was only down 50% for the final quarter--compared to, let's say, the venerable tribune company, which went before a delaware bankruptcy judge two days ago. the integrity and, to be frank, utility of the news is almost assuredly going to fall as long as the news remains relatively expensive to make well. the internet is certainly no refuge for those in search of a new journalistic spirit. flim-flam abounds and fact-checking? blogs belong to a single person or to a small collection, at best. what kind of oversight could their possibly be? we don't even edit this blog (though we should). and besides, blogs just recycle what the news media reports, anyway. the best they've come up with is interesting insights in the form of commentary. exegesis is great, and all, but it's nothing without the text to gloss.
i remember reading a report filed last year that cited evidence that 75% of figures in british media went unverified, and that advertisers used the british press association like a ventriloquist's dummy. this is is the perennial problem: the bottom line. people are going where the money is. in the united states, as with every other sort of public service, we've decided decided that provisioning money for a public media service is a sin. somehow, it leads to socialism, just like, you know, the bbc did for stalin's britain. since we can't contribute to something like that, what are our options? where do good journalists go when they aren't allowed to see white house records, they can't spend more than a few days abroad, there's no space for literary criticism except to flog bestsellers, and, to top it off, the public wouldn't know a punchy, intelligent piece if it, well, punched them in the wing-wang? i'm willing to believe that something can be done, and i'd even be interested in doing it. as is all to evident, i must concede, i don't know what that it could be.
Same Shit, Different Financial Meltdown
While American's like to think of themselves as unique, I wonder how unique our financial crisis actually is. At first glance, it certainly seems unique in its combined breadth and severity, but if its symptoms look so much like those that affected, say, Japan between 1989-Judgment Day, an understanding of that fact might help us pick the right medicine. Or not.
In any event, here is a run down of some of the more obvious similarities between the U.S. crisis and 5 historical examples (Japan, 1989; Spain, 1977; Norway, 1987; Finland, 1991; Sweden, 1991):
Ultimately, it's pretty difficult to draw any historical comparisons between historical events, particularly in discussing something so politically charged as policy prescription. As Dave and I were listening to Planet Money's profile on Keynes last night, one thing was abundantly obvious: ask four economists to explain something as fundamental as the Great Depression and get five equally convincing narratives. But on the other hand, while turning economic phenomena into typologies is both scientifically and politically problematic, what else do we have to work with?
In any event, here is a run down of some of the more obvious similarities between the U.S. crisis and 5 historical examples (Japan, 1989; Spain, 1977; Norway, 1987; Finland, 1991; Sweden, 1991):
Of course all six of the listed countries are different economically, not to mention demographically, culturally, politically and geopolitically. So how helpful can these comparisons be? Reinhart and Rogoff compare the current crisis to the historical "standard" of economic crises as a way of predicting the future. This is obviously pretty unscientific, but if nothing else, it's an interesting article:Like Japan et al., the United States has seen:
- A steep rise in housing prices during the four years preceding the crisis. (The U.S. rise was more than twice as large as the average of the other five.)
- A steep rise in equity prices. (Again, the U.S. rise was larger.)
- A large increase in its current account deficit.
- A decline in per-capita growth in gross domestic product. (In this case, the U.S. situation doesn’t appear as bad as in the five predecessors.)
- An increase in public debt. (Here again, the U.S. situation isn’t as bad as in the historical examples – but Reinhart and Rogoff add that “if one were to incorporate the huge buildup in private U.S. debt into these measures, the comparisons would be notably less favorable.”) (Source: CHE)
But even if the U.S. crisis is standard, it does more acute deflation in the stock market, for example, indicate that we will hit a market bottom sooner or just deeper? And can we compare our crisis to that of Japan considering the policy blunders that Japan made and that we have surely learned from? Actually, forget that last point. And to throw out another miscellaneous criticism, can we expect such a sharp rise in public debt given the stimulus package if that package can be expected to at least slow the decline in tax revenue?On other fronts the news is similarly grim, although perhaps not out of bounds of market expectations. In the typical severe financial crisis, the real (inflation-adjusted) price of housing tends to decline 36%, with the duration of peak to trough lasting five to six years. Given that U.S. housing prices peaked at the end of 2005, this means that the bottom won't come before the end of 2010, with real housing prices falling perhaps another 8%-10% from current levels.
Equity prices tend to bottom out somewhat more quickly, taking only three and a half years from peak to trough -- dropping an average of 55% in real terms, a mark the S&P has already touched. However, given that most stock indices peaked only around mid-2007, equity prices could still take a couple more years for a sustained rebound, at least by historical benchmarks.
Turning to unemployment, where the new administration is concentrating its focus, pain seems likely to worsen for a minimum of two more years. Over past crises, the duration of the period of rising unemployment averaged nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.
Interestingly, unemployment is a category where rich countries, with their high levels of wage insurance and stronger worker protections, tend to experience larger problems after financial crises than do emerging markets. Emerging market economies do have deeper output falls after their banking crises, but the parallels in other areas such as housing prices are quite strong.
Perhaps the most stunning message from crisis history is the simply staggering rise in government debt most countries experience. Central government debt tends to rise over 85% in real terms during the first three years after a banking crisis. This would mean another $8 trillion or $9 trillion in the case of the U.S.
Interestingly, the main reason why debt explodes is not the much ballyhooed cost of bailing out the financial system, painful as that may be. Instead, the real culprit is the inevitable collapse of tax revenues that comes as countries sink into deep and prolonged recession. Aggressive countercyclical fiscal policies also play a role, as we are about to witness in spades here in the U.S. with the passage of a more than $800 billion stimulus bill. (Source: WSJ/BigPicture)
Ultimately, it's pretty difficult to draw any historical comparisons between historical events, particularly in discussing something so politically charged as policy prescription. As Dave and I were listening to Planet Money's profile on Keynes last night, one thing was abundantly obvious: ask four economists to explain something as fundamental as the Great Depression and get five equally convincing narratives. But on the other hand, while turning economic phenomena into typologies is both scientifically and politically problematic, what else do we have to work with?
Sunday, February 1, 2009
George Soros Shorting the Pound: What the Christ?
Never one to pass up the chance to write a long-winded post on semi-relevant economic affairs, I thought I'd leave my response not sullied and obscured in the dark alleyways of the comment section unbeknownst to the vast majority of this blog's readership, but out in the clear, clean open as its very own post.
If you're too lazy to scroll down a tad, Dave made the following request:
Anyway, since I'm statistically unemployed and Lion is only unemployed in spirit, I thought I'd allow myself the liberty of taking the first crack at Dave's question. I will undoubtedly leave something insufficiently clear or entirely unexplained and if Lion feels this way, he can add on. In the comment section.
Since I don't actually remember all the nitty-gritty details, unless otherwise cited, I will just be posting excerpts of the Wikipedia page on "Black Wednesday" and then translating as best I can. Perhaps you think that's fairly unprofessional of me. On the other hand, I did mention that I was statistically unemployed, so I don't see how you could really expect otherwise.
First, some background:
How is the stability of a currency ensured? Ultimately, exchange rate manipulation falls under the purview of monetary policy. Monetary policy is essentially anything the Central Bank of a country does. When the Fed of the United States lowers the interest rate (incidentally, something it won't be doing again for the next long while), it is conducting monetary policy by making money easier (cheaper) to borrow and theoretically stimulating the economy.
But as China will tell you, interest rates also play an important role in how much money is invested into a country from abroad. If high interest rates in America impose high borrowing costs throughout the domestic economy (and therefore slow economic growth), it also means that foreign investors will receive a higher return on investments made in America relative to any other country. When the foreign money comes rolling in, attracted by higher interest rates, foreign investors are essentially selling their own currency to buy up American dollars (and with those dollars, American bonds--public and private). When this happens over and over with billions of dollars, the value of the American dollar goes up. Likewise, if the Chairman of the Fed lowers the interest rate this leads many foreign investors to seek higher rates in other countries, leading to a depreciation of the dollar. While recent news might lead you to conclude otherwise, under relatively normal market conditions, monetary policy has a significant and positive impact on exchange rates: high interest rates mean a stronger currency, low interest rates mean a weaker currency. In the United States, the exchange rate value is generally the tertiary consideration of monetary policy-making, behind domestic price control (higher rates mean lower inflation, vise-versa) and counter-cyclical economic stimulus (lower rates increase economic activity, higher rates cool things down).
Not so in Europe under the EERM which was therefore not so much a central mechanism as it was a coordinated policy between a number of European Central Bankers. One such Central Bank was the Bank of England:
Unfortunately, to some foreign investors, the whole plan lacked credibility. Did the Bank of England, which had been holding down interest rates for years, have the stomach for higher rates? If inflation persisted and the trade balance worsened, would they be willing to continue to increase interest rates at the expense of the rest of the economy's well-being?
And then there was the news. And everyone, especially rattled investors scouring headlines for a source of what might in the future possibly given certain contigencies lead to a trend in the market which would by the way be completely justified by market fundamentals, reads the news.
How does one "bet" against the value of a currency? These financial acts of wizardry are, I think, at the heart of Dave's question. I know he listens to Planet Money, so he knows what "short-selling" is, but does everyone else?
Counter to the way that most people think of the stock market should and does work (people pick stocks of companies that look like they might do well and buy shares in those stocks), short-selling is a way to profit from a stock decreasing in value. If it sounds criminal, it's only because it perhaps should be. Here's how it works:
On Monday, Ben the Baller wishes to short-sell the stock of Grandma Philanthropy's House of Cheer and Puppies. Ben goes to Lion the Lowrider on Monday, who happens to own some prime GPHCP stock, and borrows 1000 shares while signing off on the agreement that he will return the stock plus interest on Thursday. Perhaps Ben pays Lion some additional fees as well. Regardless, once Ben has borrowed the shares, he sells all 1000 immediately at the going price. In a few days, Ben buys back the shares at the price then and pays Lion back plus interest. If between Monday and Thursday the price of GPHCP stock has fallen, say from $100 a share to $80 a share, Ben truly is a Baller worthy of the title. On Monday, Ben borrowed the 1000 shares for free, sold it all for $100,000. On Thursday, he buys back the 1000 shares for $80,000 and gives them back to Lion plus the interest he owes. A little less than $20,000 for Ben in less than a week. Lion the Lowrider wins too, since he gets the interest payment for doing absolutely nothing. Of course, if the value of the stock had gone up and not down, Ben would have been in trouble since he would have had to pay more to get the stock back. But that's a different story and I don't want to talk about it.
To explain "Black Wednesday" then, George Soros and many of other international currency traders essentially did the same thing to the Pound that Ben the Baller did to GPHCP stock. Except thousands and thousands of times and with billions and billions of dollars.
If George expects to value of the British pound to go down between Monday at noon and Monday at 2pm, he borrows £10,000,000 British pounds, exchanges them for DM 29,000,000 at a rate of 2.9DM to the pound, waits two hours and, if he is correct, exchanges back the deutchmarks for £10,740,740 British pounds at the new lower rate of 2.7DM to the pound. He pays the lender back with interest and then, finally, takes his £740,740 minus interest and quickly exchanges it back into a currency that he has any confidence in. And that is how George makes over £700,000 between lunch and tea. Except now the tea is more expensive if you're in England because it's imported from India.
It isn't perfectly accurate to call this maneuver a "bet" though. The term implies taking a position against something either happening or not happening and that this act of betting itself has no impact on the outcome. This is not strictly true of currency speculation on the Sorosian-scale just as it might not true (and totally illegal) of short-selling a stock. When a lot of people (or a few people with a lot of money) get together and to short stock, they borrow a lot of that stock, and sell it at once. This has the immediate effect of decreasing the value of the stock. How fortuitous then that in a few days when the contract is due, these investors are then able to buy back the stock at a lower price. Of course this is unlikely to happen in such a straightforward way since, believe it or not, there is regulation to prevent this sort of coordinated cheating.
I don't know if such regulation exists in foreign exchange markets and, if it does, I don't know who enforces it. Regardless, even in 1992 George Soros had more money to throw around than God and, given the fact that so many investors were just waiting for the first signs of a dip in the British pound to send all their money Eastward to the continent, he didn't have to start short-selling much to get a tidal wave of investors, flighty and speculative, to conform around him and validate all of his bets.
On the receiving end of that tidal wave was the Bank of England, thrashing away with about as much success as you might expect from the metaphor:
The high interest rates were the real kicker. Coming out of a big financial and housing boom, the U.K. went through a relatively nasty recession as a result. On the other hand, the speculative attack on the pound--and the high interest rates used to defend against it--can just as much been seen a symptom of bad monetary and fiscal policy in this respect. Nobody trusted the Pound because inflation was high, the government was in debt and the trade balance...wasn't. The Bank of England and the government could have allowed the economy to come off the EERM, at least temporarily before assigning it a new or broader band, but instead chose to fight by increasing rates.
I'm not really prepared to go all counter-factual on the Bank of England. What I will say, however, and unequivocally, is the following: the concept that a single person could so dramatically tinker with the economic future of an entire country is totally fucked. And that is my conclusion.
*If on Monday £1 = $2, a radio sold to Norway for $50 = £25. If the U.S. dollar depreciates so that on Tuesday, £1 = $3, all of a sudden that radio sold to Norway for $50 only equals £16.66. This is I think what the Wikipedia article is getting at, but I might be misinterpreting.
If you're too lazy to scroll down a tad, Dave made the following request:
Could someone (Ben? Lion?) explain, though, what specifically [George Soros] did to the British sterling to make him so much money?If you're wondering who George Soros is, I'd direct you to the previous post no matter how lazy you are. I assume you know who Dave is.
Anyway, since I'm statistically unemployed and Lion is only unemployed in spirit, I thought I'd allow myself the liberty of taking the first crack at Dave's question. I will undoubtedly leave something insufficiently clear or entirely unexplained and if Lion feels this way, he can add on. In the comment section.
Since I don't actually remember all the nitty-gritty details, unless otherwise cited, I will just be posting excerpts of the Wikipedia page on "Black Wednesday" and then translating as best I can. Perhaps you think that's fairly unprofessional of me. On the other hand, I did mention that I was statistically unemployed, so I don't see how you could really expect otherwise.
First, some background:
Ensuring the relatively stability of an exchange rate helps to ensure the relative stability of foreign trade and investment into and out of a particular country. Likewise, ensuring the relative stability of an exchange rate between a number of countries ensures the relative stability of foreign trade and investment between those specific countries. If you're a German banker who wants to invest in France (think pre-Euro), you want to make sure that between the time that you make the investment and the time that that investment matures, the Franc doesn't tank against the value of the Deutch Mark, and with it the value of your invested money. In this respect, stability ensures confidence and confidence ensures increased interconnectedness, economic or otherwise.European Exchange Rate mechanism
DefinitionERM. A system created in 1979 as a way to reduce the volatility of the various Eurpoean currencies and to create a stable monetary system. The ERM created fixed margins in which a country's currency could operate. It was the predecessor of the European Economic and Monetary Union. (Source: InvestorWords)
How is the stability of a currency ensured? Ultimately, exchange rate manipulation falls under the purview of monetary policy. Monetary policy is essentially anything the Central Bank of a country does. When the Fed of the United States lowers the interest rate (incidentally, something it won't be doing again for the next long while), it is conducting monetary policy by making money easier (cheaper) to borrow and theoretically stimulating the economy.
But as China will tell you, interest rates also play an important role in how much money is invested into a country from abroad. If high interest rates in America impose high borrowing costs throughout the domestic economy (and therefore slow economic growth), it also means that foreign investors will receive a higher return on investments made in America relative to any other country. When the foreign money comes rolling in, attracted by higher interest rates, foreign investors are essentially selling their own currency to buy up American dollars (and with those dollars, American bonds--public and private). When this happens over and over with billions of dollars, the value of the American dollar goes up. Likewise, if the Chairman of the Fed lowers the interest rate this leads many foreign investors to seek higher rates in other countries, leading to a depreciation of the dollar. While recent news might lead you to conclude otherwise, under relatively normal market conditions, monetary policy has a significant and positive impact on exchange rates: high interest rates mean a stronger currency, low interest rates mean a weaker currency. In the United States, the exchange rate value is generally the tertiary consideration of monetary policy-making, behind domestic price control (higher rates mean lower inflation, vise-versa) and counter-cyclical economic stimulus (lower rates increase economic activity, higher rates cool things down).
Not so in Europe under the EERM which was therefore not so much a central mechanism as it was a coordinated policy between a number of European Central Bankers. One such Central Bank was the Bank of England:
...John Major, who, with Douglas Hurd, the then Foreign Secretary, pressured Margaret Thatcher to sign Britain up to the ERM in October 1990, effectively guaranteeing that the British Government would follow an economic[4] and monetary policy that would prevent the exchange rate between the pound and other member currencies from fluctuating by more than 6%. The pound entered the mechanism at DM 2.95 to the pound. Hence, if the exchange rate ever neared the bottom of its permitted range, DM 2.778, the government would be obliged to intervene.Again, just to keep this fresh in everyone's mind, if the value of the pound stated to slide (why this might happen in a second), the Bank of England would raise interest rates, attract more foreign investment and appreciate the currency back to the prefered level. Unfortunately, as the Wikipedia article has it in the sentence immediately following, British inflation was 3 times that of the German economy. High inflation bodes poorly for the value of any currency, though according to Wikipedia, the EERM policy was intended as a way to curtail that inflation by keeping the currency stable and the interest rates in steady proportion with the German's who have traditionally maintained a relatively high and stable rate of interest in an earnestly and predictably reasonable Teutonic way.
Unfortunately, to some foreign investors, the whole plan lacked credibility. Did the Bank of England, which had been holding down interest rates for years, have the stomach for higher rates? If inflation persisted and the trade balance worsened, would they be willing to continue to increase interest rates at the expense of the rest of the economy's well-being?
From the beginning of the 1990s, high German interest rates, set by the Bundesbank to counteract inflationary effects related to excess expenditure on German reunification, caused significant stress across the whole of the ERM. The UK and Italy had additional difficulties with their double deficits, while the UK was also hurt by the rapid depreciation of the US Dollar - a currency in which many British exports were priced - that summer. Issues of national prestige and the commitment to a doctrine that the fixing of exchange rates within the ERM was a pathway to a single European currency inhibited the adjustment of exchange rates.To summarize, the higher German rates appreciated the German DM, inducing the Bank of England to raise rates more than they otherwise might have needed to in order to stay within the "band" of accepted values. On top of that, Britain had both a fiscal deficit (which implies inflation which implies devaluation) and a current account deficit (which means they were importing more than they were exporting which also implies devaluation). Likewise, with the depreciation of the U.S. dollar and so much of the British export market (apparently) denominated in U.S. dollars, this meant British exporters were receiving even less for the same goods, putting more downward pressure on the pound.* And lastly, according to Wikipedia, Brits just weren't having the whole idea of the domestic interest rate and economy being influenced by a bunch of dirty foreigners.
And then there was the news. And everyone, especially rattled investors scouring headlines for a source of what might in the future possibly given certain contigencies lead to a trend in the market which would by the way be completely justified by market fundamentals, reads the news.
In the wake of the rejection of the Maastricht Treaty by the Danish electorate in a referendum in the spring of 1992, and announcement that there would be a referendum in France as well, those ERM currencies that were trading close to the bottom of their ERM bands came under pressure from foreign exchange traders.Lucky George Soros. He, along with a number of other currency traders, saw that the British Pound "should" devalue, that it would be potentially very costly for the Bank of England to keep it from doing so, and therefore bet that the Pound eventually would.
How does one "bet" against the value of a currency? These financial acts of wizardry are, I think, at the heart of Dave's question. I know he listens to Planet Money, so he knows what "short-selling" is, but does everyone else?
Counter to the way that most people think of the stock market should and does work (people pick stocks of companies that look like they might do well and buy shares in those stocks), short-selling is a way to profit from a stock decreasing in value. If it sounds criminal, it's only because it perhaps should be. Here's how it works:
On Monday, Ben the Baller wishes to short-sell the stock of Grandma Philanthropy's House of Cheer and Puppies. Ben goes to Lion the Lowrider on Monday, who happens to own some prime GPHCP stock, and borrows 1000 shares while signing off on the agreement that he will return the stock plus interest on Thursday. Perhaps Ben pays Lion some additional fees as well. Regardless, once Ben has borrowed the shares, he sells all 1000 immediately at the going price. In a few days, Ben buys back the shares at the price then and pays Lion back plus interest. If between Monday and Thursday the price of GPHCP stock has fallen, say from $100 a share to $80 a share, Ben truly is a Baller worthy of the title. On Monday, Ben borrowed the 1000 shares for free, sold it all for $100,000. On Thursday, he buys back the 1000 shares for $80,000 and gives them back to Lion plus the interest he owes. A little less than $20,000 for Ben in less than a week. Lion the Lowrider wins too, since he gets the interest payment for doing absolutely nothing. Of course, if the value of the stock had gone up and not down, Ben would have been in trouble since he would have had to pay more to get the stock back. But that's a different story and I don't want to talk about it.
To explain "Black Wednesday" then, George Soros and many of other international currency traders essentially did the same thing to the Pound that Ben the Baller did to GPHCP stock. Except thousands and thousands of times and with billions and billions of dollars.
If George expects to value of the British pound to go down between Monday at noon and Monday at 2pm, he borrows £10,000,000 British pounds, exchanges them for DM 29,000,000 at a rate of 2.9DM to the pound, waits two hours and, if he is correct, exchanges back the deutchmarks for £10,740,740 British pounds at the new lower rate of 2.7DM to the pound. He pays the lender back with interest and then, finally, takes his £740,740 minus interest and quickly exchanges it back into a currency that he has any confidence in. And that is how George makes over £700,000 between lunch and tea. Except now the tea is more expensive if you're in England because it's imported from India.
It isn't perfectly accurate to call this maneuver a "bet" though. The term implies taking a position against something either happening or not happening and that this act of betting itself has no impact on the outcome. This is not strictly true of currency speculation on the Sorosian-scale just as it might not true (and totally illegal) of short-selling a stock. When a lot of people (or a few people with a lot of money) get together and to short stock, they borrow a lot of that stock, and sell it at once. This has the immediate effect of decreasing the value of the stock. How fortuitous then that in a few days when the contract is due, these investors are then able to buy back the stock at a lower price. Of course this is unlikely to happen in such a straightforward way since, believe it or not, there is regulation to prevent this sort of coordinated cheating.
I don't know if such regulation exists in foreign exchange markets and, if it does, I don't know who enforces it. Regardless, even in 1992 George Soros had more money to throw around than God and, given the fact that so many investors were just waiting for the first signs of a dip in the British pound to send all their money Eastward to the continent, he didn't have to start short-selling much to get a tidal wave of investors, flighty and speculative, to conform around him and validate all of his bets.
On the receiving end of that tidal wave was the Bank of England, thrashing away with about as much success as you might expect from the metaphor:
On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent.Soros clearly wasn't alone in this operation, but he is notable both for the scope of his participation ($10 billion continually recycled in pounds) and the obscene monetary scale of his success:
Finally, the Bank of England was forced to withdraw the currency from the European Exchange Rate Mechanism and to devalue the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was dubbed "the man who broke the Bank of England."(Source: Wikipedia, Soros' site)It's difficult to say just how bad the effect of Black Wednesday was. On the one hand, the value of the British currency was in the tank for some time (which may have been good for exports, but being an island and all, not great for a host of other reasons), but the Pound appreciated fairly rapidly (oddly enough) throughout the rest of the 1990s.
The high interest rates were the real kicker. Coming out of a big financial and housing boom, the U.K. went through a relatively nasty recession as a result. On the other hand, the speculative attack on the pound--and the high interest rates used to defend against it--can just as much been seen a symptom of bad monetary and fiscal policy in this respect. Nobody trusted the Pound because inflation was high, the government was in debt and the trade balance...wasn't. The Bank of England and the government could have allowed the economy to come off the EERM, at least temporarily before assigning it a new or broader band, but instead chose to fight by increasing rates.
I'm not really prepared to go all counter-factual on the Bank of England. What I will say, however, and unequivocally, is the following: the concept that a single person could so dramatically tinker with the economic future of an entire country is totally fucked. And that is my conclusion.
*If on Monday £1 = $2, a radio sold to Norway for $50 = £25. If the U.S. dollar depreciates so that on Tuesday, £1 = $3, all of a sudden that radio sold to Norway for $50 only equals £16.66. This is I think what the Wikipedia article is getting at, but I might be misinterpreting.
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